Form 10-Q

10-Q 1 tenq06_3q.htm FORM 10-Q Form 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number 1-10746

JONES APPAREL GROUP, INC.
(Exact name of registrant as specified in its charter)

Pennsylvania (State or other jurisdiction of incorporation or organization)	06-0935166 (I.R.S. Employer Identification No.)
1411 Broadway New York, New York (Address of principal executive offices)	10018 (Zip Code)

(212) 642-3860
(Registrant's telephone number, including area code)

250 Rittenhouse Circle
Bristol, Pennsylvania 19007
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [X]

Accelerated filer [ ]

Non-accelerated filer [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class of Common Stock
$.01 par value

Outstanding at October 26, 2006
110,252,592

JONES APPAREL GROUP, INC.

Index		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
	Consolidated Balance Sheets September 30, 2006, October 1, 2005 and December 31, 2005	3
	Consolidated Statements of Income Fiscal Quarters and Nine Months ended September 30, 2006 and October 1, 2005	4
	Consolidated Statements of Stockholders' Equity Fiscal Nine Months ended September 30, 2006 and October 1, 2005	5
	Consolidated Statements of Cash Flows Fiscal Nine Months ended September 30, 2006 and October 1, 2005	6
	Notes to Consolidated Financial Statements	7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3. Quantitative and Qualitative Disclosures About Market Risk		26
Item 4. Controls and Procedures		27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		28
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		28
Item 5. Other Information		28
Item 6. Exhibits		29
Signatures		30
Exhibit Index		31

DEFINITIONS

As used in this Report, unless the context requires otherwise, "our," "us," "we" and "the Company" means Jones Apparel Group, Inc. and consolidated subsidiaries, "Sun" means Sun Apparel, Inc., "Nine West" means Nine West Footwear Corporation, "McNaughton" means McNaughton Apparel Group Inc., "Kasper" means Kasper, Ltd., "Maxwell" means Maxwell Shoe Company Inc., "Barneys" means Barneys New York, Inc., " Polo" means Polo Ralph Lauren Corporation, "SFAS" means Statement of Financial Accounting Standards and "SEC" means the United States Securities and Exchange Commission.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Jones Apparel Group, Inc.
Consolidated Balance Sheets
(All amounts in millions except per share data)

		September 30, 2006	October 1, 2005	December 31, 2005
		(Unaudited)	(Unaudited)
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents	$ 34.3	$ 29.4	$ 34.9
	Accounts receivable	572.3	649.1	458.4
	Inventories	676.2	731.0	650.0
	Deferred taxes	49.6	56.9	52.5
	Prepaid expenses and other current assets	84.2	82.6	88.5

	TOTAL CURRENT ASSETS	1,416.6	1,549.0	1,284.3
PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated depreciation and amortization of $486.4, $453.8 and $472.2		366.8	306.2	312.1
GOODWILL		1,740.5	2,098.2	2,097.3
OTHER INTANGIBLES, at cost, less accumulated amortization		823.2	829.2	827.5
OTHER ASSETS		51.2	56.5	56.6

		$ 4,398.3	$ 4,839.1	$ 4,577.8

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
	Short-term borrowings	$ 191.2	$ 378.5	$ 129.5
	Current portion of long-term debt and capital lease obligations	4.0	227.9	227.8
	Accounts payable	285.7	268.2	256.5
	Income taxes payable	64.1	63.4	54.2
	Accrued employee compensation	52.7	54.7	50.9
	Accrued expenses and other current liabilities	120.1	131.0	117.6

	TOTAL CURRENT LIABILITIES	717.8	1,123.7	836.5

NONCURRENT LIABILITIES:
	Long-term debt	752.8	752.6	752.6
	Obligations under capital leases	36.9	37.9	37.2
	Deferred taxes	194.7	175.7	175.9
	Other	122.5	95.5	109.2

	TOTAL NONCURRENT LIABILITIES	1,106.9	1,061.7	1,074.9

	TOTAL LIABILITIES	1,824.7	2,185.4	1,911.4

COMMITMENTS AND CONTINGENCIES		-	-	-
STOCKHOLDERS' EQUITY:
	Preferred stock, $.01 par value - shares authorized 1.0; none issued	-	-	-
	Common stock, $.01 par value - shares authorized 200.0; issued 152.7, 151.2 and 151.4	1.5	1.5	1.5
	Additional paid-in capital	1,301.6	1,261.8	1,269.4
	Retained earnings	2,511.0	2,384.4	2,426.2
	Accumulated other comprehensive loss	(4.4)	(5.7)	(6.5)
	Treasury stock, 42.5, 34.2 and 35.5 shares, at cost	(1,236.1)	(988.3)	(1,024.2)

	TOTAL STOCKHOLDERS' EQUITY	2,573.6	2,653.7	2,666.4

		$ 4,398.3	$ 4,839.1	$ 4,577.8

See accompanying notes to consolidated financial statements

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Jones Apparel Group, Inc.
Consolidated Statements of Income (Unaudited)
(All amounts in millions except per share data)

		Fiscal Quarter Ended		Fiscal Nine Months Ended
		September 30, 2006	October 1, 2005	September 30, 2006	October 1, 2005
Net sales		$ 1,221.6	$ 1,312.6	$ 3,481.5	$ 3,813.0
Licensing income (net)		14.4	14.9	35.9	40.2
Service income		5.0	-	12.9	-

Total revenues		1,241.0	1,327.5	3,530.3	3,853.2
Cost of goods sold		795.0	866.1	2,227.7	2,458.5

Gross profit		446.0	461.4	1,302.6	1,394.7
Selling, general and administrative expenses		334.1	321.8	990.2	991.3
Loss on sale of Polo Jeans Company business		-	-	45.1	-

Operating income		111.9	139.6	267.3	403.4
Interest income		0.5	0.1	3.3	0.9
Interest expense and financing costs		(12.7)	(19.6)	(42.8)	(57.3)
Equity in earnings of unconsolidated affiliates		1.1	1.0	2.9	2.8

Income before provision for income taxes		100.8	121.1	230.7	349.8
Provision for income taxes		37.8	44.3	107.1	131.2

Income before cumulative effect of change in accounting principle		63.0	76.8	123.6	218.6
Cumulative effect of change in accounting for share-based payments, net of tax		-	-	1.9	-

Net income		$ 63.0	$ 76.8	$ 125.5	$ 218.6

Earnings per share
Basic
	Income before cumulative effect of change in accounting principle	$0.57	$0.66	$1.11	$1.84
	Cumulative effect of change in accounting for share-based payments, net of tax	-	-	0.01	-

	Basic earnings per share	$0.57	$0.66	$1.12	$1.84

Diluted
	Income before cumulative effect of change in accounting principle	$0.56	$0.65	$1.09	$1.82
	Cumulative effect of change in accounting for share-based payments, net of tax	-	-	0.01	-

	Basic earnings per share	$0.56	$0.65	$1.10	$1.82

Weighted average common shares and share equivalents outstanding
Basic		110.5	116.5	111.7	118.9
Diluted		112.4	117.6	113.8	120.2
Dividends declared per share		$0.12	$0.12	$0.36	$0.32

See accompanying notes to consolidated financial statements

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Jones Apparel Group, Inc.
Consolidated Statements of Stockholders' Equity (Unaudited)
(All amounts in millions except per share data)

		Number of common shares outstanding	Total stock- holders' equity	Common stock	Additional paid-in capital	Retained earnings	Accumu- lated other compre- hensive income (loss)	Treasury stock
Balance, January 1, 2005		122.2	$ 2,653.9	$ 1.5	$ 1,236.4	$ 2,204.2	$ 0.8	$ (789.0)
Fiscal nine months ended October 1, 2005:
Comprehensive income:
	Net income	-	218.6	-	-	218.6	-	-
	Change in fair value of cash flow hedges, net of $1.5 tax	-	(2.2)	-	-	-	(2.2)	-
	Reclassification adjustment for hedge gains and losses included in net income, net of $1.4 tax	-	(2.1)	-	-	-	(2.1)	-
	Foreign currency translation adjustments	-	(2.2)	-	-	-	(2.2)	-

	Total comprehensive income		212.1

Issuance of restricted stock to employees, net of forfeitures		0.7	-	-	-	-	-	-
Amortization expense in connection with employee stock options and restricted stock		-	13.8	-	13.8	-	-	-
Exercise of employee stock options		0.4	10.5	-	10.5	-	-	-
Excess tax benefits from share-based payment arrangements		-	1.1	-	1.1	-	-	-
Dividends on common stock ($0.32 per share)		-	(38.4)	-	-	(38.4)	-	-
Treasury stock acquired		(6.3)	(199.3)	-	-	-	-	(199.3)

Balance, October 1, 2005		117.0	$ 2,653.7	$ 1.5	$ 1,261.8	$ 2,384.4	$ (5.7)	$ (988.3)

Balance, January 1, 2006		115.9	$ 2,666.4	$ 1.5	$ 1,269.4	$ 2,426.2	$ (6.5)	$ (1,024.2)
Fiscal nine months ended September 30, 2006:
Comprehensive income:
	Net income	-	125.5	-	-	125.5	-	-
	Change in fair value of cash flow hedges, net of $0.8 tax	-	1.0	-	-	-	1.0	-
	Reclassification adjustment for hedge gains and losses included in net income, net of $0.7 tax	-	(1.2)	-	-	-	(1.2)	-
	Foreign currency translation adjustments	-	2.3	-	-	-	2.3	-

	Total comprehensive income		127.6

Issuance of restricted stock to employees, net of forfeitures		0.5	-	-	-	-	-	-
Amortization expense in connection with employee stock options and restricted stock		-	13.7	-	13.7	-	-	-
Exercise of employee stock options		0.8	19.3	-	19.3	-	-	-
Excess tax benefits from share-based payment arrangements		-	2.3	-	2.3	-	-	-
Dividends on common stock ($0.36 per share)		-	(40.7)	-	-	(40.7)	-	-
Cumulative effect of change in accounting for share-based payments		-	(3.1)	-	(3.1)	-	-	-
Treasury stock acquired		(7.0)	(211.9)	-	-	-	-	(211.9)

Balance, September 30, 2006		110.2	$ 2,573.6	$ 1.5	$ 1,301.6	$ 2,511.0	$ (4.4)	$ (1,236.1)

See accompanying notes to consolidated financial statements

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Jones Apparel Group, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(All amounts in millions)

			Fiscal Nine Months Ended
			September 30, 2006	October 1, 2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income			$ 125.5	$ 218.6

Adjustments to reconcile net income to net cash provided by operating activities, net of sale of Polo Jeans Company business:
	Loss on sale of Polo Jeans Company business		45.1	-
	Cumulative effect of change in accounting for share-based payments		(3.1)	-
	Depreciation and amortization		77.3	76.9
	Equity in earnings of unconsolidated affiliates		(2.9)	(2.8)
	Dividends received from unconsolidated affiliates		-	1.3
	Provision for losses on accounts receivable		0.8	0.5
	Deferred taxes		20.2	37.4
	Other		1.6	5.8
	Changes in operating assets and liabilities:
		Accounts receivable	(114.2)	(200.7)
		Inventories	(55.5)	(66.3)
		Prepaid expenses and other current assets	12.8	(5.0)
		Other assets	2.4	3.7
		Accounts payable	29.0	8.3
		Income taxes payable	9.9	33.3
		Accrued expenses and other current liabilities	6.0	(10.0)
		Other liabilities	6.3	0.6

		Total adjustments	35.7	(117.0)

		Net cash provided by operating activities	161.2	101.6

CASH FLOWS FROM INVESTING ACTIVITIES:
	Net proceeds from sale of Polo Jeans Company business		350.6	-
	Capital expenditures		(115.4)	(60.6)
	Payments relating to acquisition of Barneys		-	(4.1)
	Payments relating to acquisition of Maxwell		-	(0.1)
	Acquisition of intangibles		-	(0.1)
	Capital contributions to unconsolidated affiliates		-	(0.7)
	Other		0.1	0.6

		Net cash provided by (used in) investing activities	235.3	(65.0)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Net borrowings under credit facilities		61.7	309.2
	Redemption at maturity of 7.875% Senior Notes		(225.0)	-
	Redemption at maturity of 8.375% Senior Notes		-	(129.6)
	Principal payments on capital leases		(3.2)	(3.4)
	Debt issuance costs		-	(0.5)
	Purchases of treasury stock		(211.9)	(199.3)
	Dividends paid		(40.7)	(38.4)
	Proceeds from exercise of employee stock options		19.3	10.5
	Excess tax benefits from share-based payment arrangements		2.3	-

		Net cash used in financing activities	(397.5)	(51.5)

EFFECT OF EXCHANGE RATES ON CASH			0.4	(0.7)

NET DECREASE IN CASH AND CASH EQUIVALENTS			(0.6)	(15.6)
CASH AND CASH EQUIVALENTS, BEGINNING			34.9	45.0

CASH AND CASH EQUIVALENTS, ENDING			$ 34.3	$ 29.4

See accompanying notes to consolidated financial statements

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JONES APPAREL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Jones Apparel Group, Inc. and its wholly-owned subsidiaries. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and in accordance with the requirements of Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and the footnotes thereto included within our Annual Report on Form 10-K.

In our opinion, the information presented reflects all adjustments necessary for a fair statement of interim results. All such adjustments are of a normal and recurring nature. Certain reclassifications have been made to conform prior year data with the current presentation. The foregoing interim results are not necessarily indicative of the results of operations for the full year ending December 31, 2006.

SALE OF POLO JEANS COMPANY BUSINESS

In October 1995, we acquired an exclusive license to manufacture and market women's shirts, blouses, skirts, jackets, suits, sweaters, pants, vests, coats, outerwear and hats under the Lauren by Ralph Lauren trademark in the United States, Canada and Mexico pursuant to license and design service agreements with Polo (collectively, the "Lauren License"), which were to expire on December 31, 2006. In May 1998, we acquired an exclusive license to manufacture and market women's dresses, shirts, blouses, skirts, jackets, suits, sweaters, pants, vests, coats, outerwear and hats under the Ralph by Ralph Lauren trademark in the United States, Canada and Mexico pursuant to license and design service agreements with Polo (the "Ralph License"). The Ralph License was scheduled to end on December 31, 2003.

During the course of the discussions concerning the Ralph License, Polo asserted that the expiration of the Ralph License would cause the Lauren License agreements to end on December 31, 2003, instead of December 31, 2006. We believed that this was an improper interpretation and that the expiration of the Ralph License did not cause the Lauren License to end.

On June 3, 2003, we announced that our discussions with Polo regarding the interpretation of the Lauren License had reached an impasse and that, as a result, we had filed a complaint in the New York State Supreme Court against Polo and its affiliates and our former President, Jackwyn Nemerov. The complaint alleged that Polo breached the Lauren License agreements by claiming that the license ends at the end of 2003. The complaint also alleged that Ms. Nemerov breached the confidentiality and non-compete provisions of her employment agreement with us. Additionally, Polo was alleged to have induced Ms. Nemerov to breach her employment agreement and Ms. Nemerov was alleged to have induced Polo to breach the Lauren License agreements. We asked the court to enter a judgment for compensatory damages of $550 million, as well as punitive damages, and to enforce the confidentiality and non-compete provisions of Ms. Nemerov's employment agreement.

These matters were resolved by settlement dated January 22, 2006, which closed on February 3, 2006. In connection with this settlement, we entered into a Stock Purchase Agreement with Polo and certain of its subsidiaries with respect to the sale to Polo of all outstanding stock of Sun. We received gross proceeds of $355.0 million in connection with the sale and the settlement. Sun's assets and liabilities on the closing date primarily related to the Polo Jeans Company business, which Sun operated under long-term license and design agreements entered into with Polo in 1995. We retained distribution and product development facilities in El Paso, Texas, along with certain working capital items, including accounts receivable and accounts payable. In addition, as part of the agreements, we will continue to provide certain support services to Polo (including manufacturing, distribution, information technology and other financial and administrative functions) for a limited period of time.

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We recorded a pre-tax loss of approximately $145.1 million after allocating $356.7 million of goodwill to the business sold and a pre-tax gain of $100.0 million related to the litigation settlement. Approximately $3.7 million in state and local taxes have been accrued related to the litigation settlement, resulting in a combined after tax loss of approximately $48.8 million. The combined loss created federal and state capital loss carryforwards that we do not expect to be realizable and, as a result, we increased our deferred tax valuation allowance to offset the deferred tax benefit recorded as a result of the combined loss.

Long-lived assets included in the sale include $2.0 million of net property, plant and equipment and $5.5 million of unamortized long-term prepaid marketing expenses. Net sales for the Polo Jeans Company business, which are reported under the wholesale better apparel segment, were $78.4 million for the fiscal quarter ended October 1, 2005 and $24.6 million and $236.1 million for the fiscal nine months ended September 30, 2006 and October 1, 2005, respectively.

STOCK-BASED EMPLOYEE COMPENSATION

Prior to January 1, 2003, pursuant to a provision in SFAS No. 123, "Accounting for Stock-Based Compensation," we had elected to continue using the intrinsic-value method of accounting for stock options granted to employees in accordance with Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees." Accordingly, compensation expense for stock options had been measured as the excess, if any, of the quoted market price of our stock at the date of the grant over the amount the employee must pay to acquire the stock. Under this approach, we had only recognized compensation expense for options awarded to employees at below-market prices, with the expense recognized over the vesting period of the options. Effective January 1, 2003, we adopted the fair value method of accounting for employee stock options for all options granted after December 31, 2002 pursuant to the "prospective method" set forth in SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." Under this approach, the fair value of the option on the date of grant (as determined by the Black-Scholes-Merton option pricing model) was amortized to compensation expense over the option's vesting period.

In December 2004, the FASB issued a revision of SFAS No. 123, "Share-Based Payment" (hereinafter referred to as "SFAS No. 123R"), which requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. This Statement establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership plans. We adopted SFAS No. 123R on January 1, 2006 using the modified prospective application option. As a result, the compensation cost for the portion of awards we granted before January 1, 2006 for which the requisite service had not been rendered and that were outstanding as of January 1, 2006 will be recognized as the remaining requisite service is rendered. In addition, the adoption of SFAS No. 123R required us to change from recognizing the effect of forfeitures as they occur to estimating the number of outstanding instruments for which the requisite service is not expected to be rendered. As a result, we recorded a pretax gain of $3.1 million on January 1, 2006, which is reported as a cumulative effect of a change in accounting principle. We are also required to change the amortization period for employees eligible to retire from the period over which the awards vest to the period from the grant date to the date the employee is eligible to retire. The adoption of SFAS No. 123R will not have a material effect on our results of operations or our financial position. Concurrently with the adoption of SFAS No. 123R, we have shifted the composition of our share-based compensation awards towards the use of restricted shares and away from the use of employee stock options.

Both the share-based employee compensation cost included in the determination of net income as reported and the share-based employee compensation cost that would have been included in the determination of net income if the fair value based method had been applied to all awards, as well as the resulting pro forma net income and earnings per share using the fair value approach, are presented in the following table. These pro forma amounts may not be representative of future disclosures, since the fair value of stock options is amortized to expense over the vesting period and additional options may be granted in future years. At September 30, 2006, total compensation cost related to unvested awards not yet recognized was $25.4 million, which is expected to be amortized over a weighted-average period of approximately 21.5 months.

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	Fiscal Quarter Ended		Fiscal Nine Months Ended
(In millions except per share data)	September 30, 2006	October 1, 2005	September 30, 2006	October 1, 2005
Net income - as reported	$ 63.0	$ 76.8	$ 125.5	$ 218.6
Add: stock-based employee compensation cost, net of related tax effects, included in the determination of net income as reported	2.8	2.7	8.6	8.6
Deduct: stock-based employee compensation cost, net of related tax effects, that would have been included in the determination of net income if the fair value-based method had been applied to all awards	(2.8)	(3.2)	(8.6)	(10.1)

Net income - pro forma	$ 63.0	$ 76.3	$ 125.5	$ 217.1

Basic earnings per share
As reported	$0.57	$0.66	$1.12	$1.84
Pro forma	$0.57	$0.66	$1.12	$1.83
Diluted earnings per share
As reported	$0.56	$0.65	$1.10	$1.82
Pro forma	$0.56	$0.65	$1.10	$1.81

EARNINGS PER SHARE

The computation of basic and diluted earnings per share is as follows:

	Fiscal Quarter Ended		Fiscal Nine Months Ended
(In millions except per share amounts)	September 30, 2006	October 1, 2005	September 30, 2006	October 1, 2005
Basic
Net income	$ 63.0	$ 76.8	$ 125.5	$ 218.6
Weighted average common shares outstanding	110.5	116.5	111.7	118.9

Basic earnings per share	$0.57	$0.66	$1.12	$1.84

Diluted
Net income	$ 63.0	$ 76.8	$ 125.5	$ 218.6

Weighted average common shares outstanding	110.5	116.5	111.7	118.9
Effect of dilutive securities:
Employee stock options and restricted stock	1.9	1.1	2.1	1.3

Weighted average common shares and share equivalents outstanding	112.4	117.6	113.8	120.2

Diluted earnings per share	$0.56	$0.65	$1.10	$1.82

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ACCOUNTS RECEIVABLE

Accounts receivable consist of the following:

(In millions)	September 30, 2006	October 1, 2005	December 31, 2005
Trade accounts receivable	$ 569.3	$ 663.9	$ 459.1
Credit card receivable	45.3	38.4	40.5
Allowances for doubtful accounts, returns, discounts and co-op advertising	(42.3)	(53.2)	(41.2)

	$ 572.3	$ 649.1	$ 458.4

ACCRUED RESTRUCTURING COSTS

In connection with the acquisitions of McNaughton, Kasper and Maxwell, we assessed and formulated plans to restructure certain operations of each company. These plans involved the closure of distribution facilities and certain offices. The objectives of the plans were to eliminate unprofitable or marginally profitable lines of business and reduce overhead expenses.

In late 2003, we began to evaluate the need to broaden global sourcing capabilities to respond to the competitive pricing and global sourcing capabilities of our denim competitors, as the favorable production costs from non-duty/non-quota countries and the breadth of fabric options from Asia began to outweigh the benefits of Mexico's quick turn and superior laundry capabilities. The decision to expand global sourcing, combined with lower projected shipping levels of denim products for 2005, led us to begin a comprehensive review of our denim manufacturing during the fourth quarter of 2004. The result of this review was the development of a plan of reorganization of our Mexican operations to reduce costs associated with excess capacity.

On July 11, 2005, we announced that we had completed a comprehensive review of our denim manufacturing operations located in Mexico. The primary action plan arising from this review resulted in the closing of the laundry, assembly and distribution operations located in San Luis, Mexico (the "denim restructuring"). All manufacturing has been consolidated into existing operations in Durango and Torreon, Mexico. A total of 3,170 employees have been terminated as a result of the closure. We have undertaken a number of measures to assist affected employees, including severance and benefits packages. As a result of this consolidation, we expect that our manufacturing operations will perform more efficiently, thereby improving our operating performance.

In connection with the denim restructuring, we recorded $11.6 million of net pre-tax costs (of which $12.1 million was recorded in 2005 and $0.5 million was reversed in 2006), which includes $5.1 million of one-time termination benefits, $3.2 million of losses on the sale of property, plant and equipment, $2.2 million of contract termination costs and $1.1 million of legal and other associated costs. Of these amounts, $10.1 million were reported as cost of sales and $1.5 million were reported as a selling, general and administrative expense in the wholesale moderate apparel segment. The restructuring was substantially completed during the fiscal quarter ended April 1, 2006.

On May 15, 2006, we announced the closing of our Secaucus, New Jersey warehouse to reduce excess capacity. In connection with the closing, we incurred $2.7 million of one-time termination benefits and associated employee costs for 211 employees and accrued $1.6 million for cleanup costs and rent payments through December 31, 2006. These expenses are reported as selling, general and administrative expenses in the wholesale better apparel segment. The restructuring was substantially completed in September 2006.

On May 30, 2006, we announced the closing of our Stein Mart leased shoe departments, effective early January 2007. In connection with the closing, we expect to incur $1.2 million of one-time termination benefits and associated employee costs for an estimated 550 employees, which is being accrued straight-line over the period between the announcement and the projected closing date. Of this amount, $0.7 million was reported as a selling, general and administrative expense in the retail segment during the fiscal nine months ended September 30, 2006.

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On September 12, 2006, we announced the closing of certain El Paso, Texas and Mexican operations related to the decision by Polo to discontinue the Polo Jeans Company product line (the "manufacturing restructuring"), which we produced for Polo subsequent to the sale of the Polo Jeans Company business to Polo in February 2006. In connection with the El Paso closing, we expect to incur $3.6 million of one-time termination benefits and associated employee costs for an estimated 111 employees. Of this amount, $0.4 million was reported as a selling, general and administrative expense and $0.1 was reported as a cost of sales in the wholesale moderate apparel segment during the fiscal quarter ended September 30, 2006, and the remaining $3.1 million will be accrued on a straight-line basis over the period each employee is required to render service to receive the benefit. In connection with the Mexican closing, we expect to incur $4.0 million of one-time termination benefits and associated employee costs for an estimated 1,562 employees. During the quarter ended September 30, 2006, we paid $0.3 million to 262 employees, which was recorded as a cost of sales in the wholesale moderate apparel segment; the remaining $3.7 million (for an estimated 1,300 employees) we expect to record in the quarter ended December 31, 2006. We are currently evaluating the related property, plant and equipment for impairment and cleanup costs; any resulting charges will be recorded during the quarter ended December 31, 2006. The closings will be substantially completed by the end of March 2007.

The accrual of restructuring costs and liabilities, of which $3.9 million is included in accrued expenses and other current liabilities and $1.3 million is included in other noncurrent liabilities, is as follows:

(In millions)	Severance and other employee costs	Closing and consolidation of facilities	Denim restructuring	Manufacturing restructuring	Total
Balance, January 1, 2005	$ 6.5	$ 18.1	$ -	$ -	$ 24.6
Net additions (reversals)	(0.7)	(6.5)	9.0	-	1.8
Payments and reductions	(5.6)	(8.3)	(5.4)	-	(19.3)

Balance, October 1, 2005	$ 0.2	$ 3.3	$ 3.6	$ -	$ 7.1


Balance, January 1, 2006	$ 3.4	$ 2.1	$ 2.5	$ -	$ 8.0
Net additions (reversals)	3.9	1.6	(0.5)	0.8	5.8
Payments and reductions	(5.7)	(0.8)	(1.8)	(0.3)	(8.6)

Balance, September 30, 2006	$ 1.6	$ 2.9	$ 0.2	$ 0.5	$ 5.2

Estimated severance payments and other employee costs of $1.6 million accrued at September 30, 2006 relate to one-time termination benefits for 562 employees at locations to be closed and continuing benefits for employees previously terminated. Employee groups affected (totaling an estimated 1,020 employees) include retail, administrative, warehouse and management personnel at locations closed.

The $0.7 million reversal in the fiscal nine months ended October 1, 2005 represents $0.6 million of adjustments related to severance accruals for the Kasper and Maxwell acquisitions, which were recorded as reductions of goodwill, and $0.1 million related to the closing of the Mexican and El Paso production facilities, which was recorded as a reduction of selling, general and administrative expenses in the moderate wholesale apparel segment.

During the fiscal nine months ended September 30, 2006 and October 1, 2005, $5.7 million and $5.6 million, respectively, of the reserve was utilized (relating to partial or full severance and related costs for 293 and 137 employees, respectively).

The $2.9 million accrued at September 30, 2006 for the consolidation of facilities relates to expected costs to be incurred, including lease obligations, for closing certain acquired facilities in connection with consolidating their operations into our other existing facilities. The $1.6 million addition in the fiscal nine months ended September 30, 2006 relates to cleanup costs and remaining rent payments for the Secaucus facility through December 31, 2006. The $6.5 million reversal in the fiscal nine months ended October 1, 2005 includes a $1.2 million adjustment related to the closing of an acquired Maxwell facility and a $5.0 million adjustment related to the closing of a Kasper facility, both of which were recorded as reductions of goodwill, and a $0.3 million

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reduction related to the final settlement of a previously recorded lease liability for a North Carolina facility, which was recorded as a reduction of selling, general and administrative expenses in the wholesale better apparel segment.

The details of the denim restructuring accruals are as follows:

(In millions)	One-time termination benefits	Contract termination costs	Other associated costs	Total denim restructuring
Balance, January 1, 2005	$ -	$ -	$ -	$ -
Additions	5.3	2.6	1.1	9.0
Payments and reductions	(4.7)	(0.2)	(0.5)	(5.4)

Balance, October 1, 2005	$ 0.6	$ 2.4	$ 0.6	$ 3.6

Balance, January 1, 2006	$ 0.4	$ 1.6	$ 0.5	$ 2.5
Reversals	(0.2)	(0.3)	-	(0.5)
Payments and reductions	(0.2)	(1.3)	(0.3)	(1.8)

Balance, September 30, 2006	$ -	$ -	$ 0.2	$ 0.2

During the fiscal nine months ended September 30, 2006, we settled all outstanding lease commitments for facilities we closed, resulting in a $0.3 million reversal, of which $0.2 million and $0.1 million was recorded as a reduction of cost of sales and selling, general and administrative expenses, respectively, in the wholesale moderate apparel segment. During the fiscal nine months ended September 30, 2006, $0.2 million of the termination benefits reserve was utilized (relating to costs for 18 employees) and $0.2 million of the accrual was reversed to cost of sales in the wholesale moderate apparel segment.

Our plans have not been finalized in all areas, and additional restructuring costs may result as we continue to evaluate and assess the impact of duplicate responsibilities, warehouses and office locations. We do not expect any final adjustments to be material. Any additional costs will be charged to operations in the period in which they occur.

STATEMENT OF CASH FLOWS

Fiscal Nine Months Ended: (In millions)	September 30, 2006	October 1, 2005
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$ 35.7	$ 51.6
Net income tax payments	74.2	56.4

Supplemental disclosures of non-cash investing and financing activities:
Equipment acquired through capital lease financing	3.9	0.5
Restricted stock issued to employees	18.6	24.6

Details of acquisitions
Fair value of assets acquired	$ -	$ 4.2
Liabilities assumed	-	-

Cash paid for acquisitions	-	4.2
Cash acquired in acquisitions	-	-

Net cash paid for acquisitions	$ -	$ 4.2

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INVENTORIES

Inventories are summarized as follows (in millions):

	September 30, 2006	October 1, 2005	December 31, 2005
Raw materials	$ 12.1	$ 18.0	$ 16.6
Work in process	18.1	26.3	17.7
Finished goods	646.0	686.7	615.7

	$ 676.2	$ 731.0	$ 650.0

SEGMENT INFORMATION

We identify operating segments based on, among other things, the way our management organizes the components of our business for purposes of allocating resources and assessing performance. Our operations are comprised of four reportable segments: wholesale better apparel, wholesale moderate apparel, wholesale footwear and accessories, and retail. Segment revenues are generated from the sale of apparel, footwear and accessories through wholesale channels and our own retail locations. The wholesale segments include wholesale operations with third party department and other retail stores, the retail segment includes operations by our own stores, and income and expenses related to trademarks, licenses and general corporate functions are reported under "other and eliminations." We define segment profit as operating income before net interest expense, equity in earnings of unconsolidated affiliates and income taxes. Summarized below are our revenues and income by reportable segment for the fiscal quarters and nine month periods ended September 30, 2006 and October 1, 2005.

(In millions)	Wholesale Better Apparel	Wholesale Moderate Apparel	Wholesale Footwear & Accessories	Retail	Licensing, Other & Eliminations	Consolidated
For the fiscal quarter ended September 30, 2006
Revenues from external customers	$ 320.7	$ 287.4	$ 260.0	$ 357.8	$ 15.1	$ 1,241.0
Intersegment revenues	41.9	0.9	16.0	-	(58.8)	-

Total revenues	362.6	288.3	276.0	357.8	(43.7)	1,241.0

Segment income	$ 48.8	$ 20.4	$ 36.7	$ 15.0	$ (9.0)	111.9

Net interest expense						(12.2)
Equity in earnings of unconsolidated affiliates						1.1

Income before provision for income taxes						$ 100.8

For the fiscal quarter ended October 1, 2005
Revenues from external customers	$ 396.7	$ 337.8	$ 262.2	$ 315.9	$ 14.9	$ 1,327.5
Intersegment revenues	41.7	1.1	9.6	-	(52.4)	-

Total revenues	438.4	338.9	271.8	315.9	(37.5)	1,327.5

Segment income	$ 62.6	$ 12.2	$ 48.5	$ 23.6	$ (7.3)	139.6

Net interest expense						(19.5)
Equity in earnings of unconsolidated affiliates						1.0

Income before provision for income taxes						$ 121.1

For the fiscal nine months ended September 30, 2006
Revenues from external customers	$ 887.7	$ 887.4	$ 691.1	$ 1,026.2	$ 37.9	$ 3,530.3
Intersegment revenues	112.7	3.0	38.5	-	(154.2)	-

Total revenues	1,000.4	890.4	729.6	1,026.2	(116.3)	3,530.3

Segment income	$ 135.6	$ 84.4	$ 75.3	$ 52.6	$ (35.5)	312.4

Loss on sale of Polo Jeans Company business						(45.1)
Net interest expense						(39.5)
Equity in earnings of unconsolidated affiliates						2.9

Income before provision for income taxes						$ 230.7

For the fiscal nine months ended October 1, 2005
Revenues from external customers	$ 1,125.9	$ 999.4	$ 748.7	$ 939.1	$ 40.1	$ 3,853.2
Intersegment revenues	114.6	4.0	30.6	-	(149.2)	-

Total revenues	1,240.5	1,003.4	779.3	939.1	(109.1)	3,853.2

Segment income	$ 160.2	$ 80.8	$ 115.4	$ 73.5	$ (26.5)	403.4

Net interest expense						(56.4)
Equity in earnings of unconsolidated affiliates						2.8

Income before provision for income taxes						$ 349.8

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DERIVATIVES

SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," subsequently amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" and SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (as amended, hereinafter referred to as "SFAS 133"), establishes accounting and reporting standards for derivative instruments. Specifically, SFAS 133 requires us to recognize all derivatives as either assets or liabilities on the balance sheet and to measure those instruments at fair value. Additionally, the fair value adjustments will affect either stockholders' equity or net income, depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity.

We are exposed to market risk related to changes in foreign currency exchange rates. We have assets and liabilities denominated in certain foreign currencies and purchase products from foreign suppliers who require payment in funds other than the U.S. Dollar. At September 30, 2006, we had outstanding foreign exchange contracts to exchange Canadian Dollars for a total of US $26.0 million through December 31, 2007, US $36.0 million for Euros through October 2007 and US $1.0 million for British Pounds through September 2007.

We recorded amortization of net gains resulting from the termination of interest rate swaps and locks of $2.3 million and $5.2 million during the fiscal nine months ended September 30, 2006 and October 1, 2005, respectively, as a reduction of interest expense. We reclassified $0.4 million and $1.7 million of net losses from foreign currency exchange contracts to cost of sales during the fiscal nine months ended September 30, 2006 and October 1, 2005, respectively. There has been no material ineffectiveness related to our foreign currency exchange contracts as the instruments are designed to be highly effective in offsetting losses and gains on transactions being hedged. If foreign currency exchange rates do not change from their September 30, 2006 amounts, we estimate that any reclassifications from other comprehensive income to earnings within the next 12 months will not be material. The actual amounts that will be reclassified to earnings over the next 12 months could vary, however, as a result of changes in market conditions.

PENSION PLANS

Components of Net Periodic Benefit Cost

	Fiscal Quarter Ended		Fiscal Nine Months Ended
(In millions)	September 30, 2006	October 1, 2005	September 30, 2006	October 1, 2005
Interest cost	$ 0.5	$ 0.5	$ 1.6	$ 1.6
Expected return on plan assets	(0.4)	(0.4)	(1.4)	(1.4)
Settlements	0.7	-	0.7	-
Amortization of net loss	0.2	0.3	0.7	0.8

Net periodic benefit cost	$ 1.0	$ 0.4	$ 1.6	$ 1.0

Employer Contributions

As of September 30, 2006, we have made contributions of $4.3 million to our defined benefit pension plans. We do not anticipate making any additional contributions during 2006.

NEW ACCOUNTING STANDARDS

In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments -an amendment of FASB Statements No. 133 and 140," which simplifies accounting for certain hybrid financial instruments by permitting fair value remeasurement for any hybrid instrument that contains an embedded derivative that otherwise would require bifurcation and eliminates a restriction on the passive derivative instruments that a qualifying special-purpose entity may hold. SFAS No. 155 is effective for all financial instruments acquired, issued or subject to a remeasurement (new basis) event occurring after the beginning of

- 14 -

an entity's first fiscal year that begins after September 15, 2006. The adoption of SFAS No. 155 will have no impact on our results of operations or our financial position.

In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140," which establishes, among other things, the accounting for all separately recognized servicing assets and servicing liabilities by requiring that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. SFAS No. 156 is effective as of the beginning of an entity's first fiscal year that begins after September 15, 2006. The adoption of SFAS No. 156 will have no impact on our results of operations or our financial position.

In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109," which establishes that the financial statement effects of a tax position taken or expected to be taken in a tax return are to be recognized in the financial statements when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 is not expected to have a material impact on our results of operations or our financial position.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of SFAS No. 157 is not expected to have a material impact on our results of operations or our financial position.

In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R)," which requires a business entity to recognize the overfunded or underfunded status of a single-employer defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in comprehensive income in the year in which the changes occur. SFAS No. 158 also requires a business entity to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. As our defined benefit pension plans are currently underfunded and benefits are either frozen or increase only though interest credits, the adoption of SFAS No. 158 will not have a material impact on our results of operations or our financial position.

SUBSEQUENT EVENT

On October 12, 2006, Mosaic Fashions hf ("Mosaic") completed its acquisition of United Kingdom retailer Rubicon Retail Limited ("Rubicon"). As a result of our sale of Nine West's United Kingdom operations in January 2001, we obtained warrants to purchase stock in Rubicon. These warrants were exercisable only upon a change of control of Rubicon (including a public offering of Rubicon's shares) and, therefore, had no ascertainable value prior to Mosaic's acquisition of Rubicon. Upon this acquisition, we exercised these outstanding warrants and Mosaic purchased the resulting shares. As a result, we will record a gain of $17.7 million in the fiscal quarter ended December 31, 2006.

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SUPPLEMENTAL SUMMARIZED FINANCIAL INFORMATION

Certain of our subsidiaries function as co-issuers of the outstanding debt of Jones Apparel Group, Inc. ("Jones"), including Jones Apparel Group USA, Inc. ("Jones USA"), Jones Apparel Group Holdings, Inc. ("Jones Holdings"), Nine West and Jones Retail Corporation ("Jones Retail")(collectively, including Jones, the "Issuers"). Each subsidiary co-issuer is 100% owned, directly or indirectly, by Jones.

The following condensed consolidating balance sheets, statements of income and statements of cash flows for the Issuers and our other subsidiaries have been prepared using the equity method of accounting in accordance with the requirements for presentation of such information. Separate financial statements and other disclosures concerning Jones are not presented as Jones has no independent operations or assets. There are no contractual restrictions on distributions from Jones USA, Jones Holdings, Nine West or Jones Retail to Jones.

Condensed Consolidating Balance Sheets
(In millions)

		September 30, 2006				December 31, 2005
		Issuers	Others	Eliminations	Cons- olidated	Issuers	Others	Eliminations	Cons- olidated
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents	$ 13.7	$ 20.6	$ -	$ 34.3	$ 20.3	$ 14.6	$ -	$ 34.9
	Accounts receivable - net	263.4	308.9	-	572.3	178.8	279.6	-	458.4
	Inventories	325.6	358.2	(7.6)	676.2	282.4	374.6	(7.0)	650.0
	Prepaid and refundable income taxes	1.6	6.6	(8.2)	-	1.5	6.5	(8.0)	-
	Deferred taxes	21.5	28.1	-	49.6	17.7	35.6	(0.8)	52.5
	Prepaid expenses and other current assets	39.6	44.6	-	84.2	45.7	42.8	-	88.5

	TOTAL CURRENT ASSETS	665.4	767.0	(15.8)	1,416.6	546.4	753.7	(15.8)	1,284.3

Property, plant and equipment - net		143.4	223.4	-	366.8	133.6	178.5	-	312.1
Due from affiliates		74.3	758.8	(833.1)	-	63.5	624.8	(688.3)	-
Goodwill		1,456.2	284.3	-	1,740.5	1,784.3	313.0	-	2,097.3
Other intangibles - net		166.8	656.4	-	823.2	166.8	660.7	-	827.5
Investments in subsidiaries		2,348.3	-	(2,348.3)	-	2,205.2	-	(2,205.2)	-
Other assets		29.3	23.6	(1.7)	51.2	30.7	27.4	(1.5)	56.6

		$ 4,883.7	$ 2,713.5	$ (3,198.9)	$ 4,398.3	$ 4,930.5	$ 2,558.1	$ (2,910.8)	$ 4,577.8

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
	Short-term borrowings	$ 191.2	$ -	$ -	$ 191.2	$ 129.5	$ -	$ -	$ 129.5
	Current portion of long-term debt and capital lease obligations	1.4	2.6	-	4.0	226.6	1.2	-	227.8
	Accounts payable	126.6	159.1	-	285.7	118.4	138.1	-	256.5
	Income taxes payable	70.5	15.4	(21.8)	64.1	54.9	17.8	(18.5)	54.2
	Deferred taxes	-	-	-	-	0.9	-	(0.9)	-
	Accrued expenses and other current liabilities	97.9	74.9	-	172.8	78.5	90.0	-	168.5

	TOTAL CURRENT LIABILITIES	487.6	252.0	(21.8)	717.8	608.8	247.1	(19.4)	836.5

NONCURRENT LIABILITIES:
	Long-term debt	749.3	3.5	-	752.8	749.2	3.4	-	752.6
	Obligations under capital leases	11.5	25.4	-	36.9	12.5	24.7	-	37.2
	Deferred taxes	9.1	175.4	10.2	194.7	10.7	158.0	7.2	175.9
	Due to affiliates	758.8	74.3	(833.1)	-	624.8	63.5	(688.3)	-
	Other	44.1	78.4	-	122.5	38.0	71.2	-	109.2

	TOTAL NONCURRENT LIABILITIES	1,572.8	357.0	(822.9)	1,106.9	1,435.2	320.8	(681.1)	1,074.9

	TOTAL LIABILITIES	2,060.4	609.0	(844.7)	1,824.7	2,044.0	567.9	(700.5)	1,911.4

STOCKHOLDERS' EQUITY:
	Common stock and additional paid-in capital	1,303.1	1,589.7	(1,589.7)	1,303.1	1,270.9	1,631.1	(1,631.1)	1,270.9
	Retained earnings	2,760.7	512.9	(762.6)	2,511.0	2,646.3	360.0	(580.1)	2,426.2
	Accumulated other comprehensive income (loss)	(4.4)	1.9	(1.9)	(4.4)	(6.5)	(0.9)	0.9	(6.5)
	Treasury stock	(1,236.1)	-	-	(1,236.1)	(1,024.2)	-	-	(1,024.2)

	TOTAL STOCKHOLDERS' EQUITY	2,823.3	2,104.5	(2,354.2)	2,573.6	2,886.5	1,990.2	(2,210.3)	2,666.4

		$ 4,883.7	$ 2,713.5	$ (3,198.9)	$ 4,398.3	$ 4,930.5	$ 2,558.1	$ (2,910.8)	$ 4,577.8

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Condensed Consolidating Statements of Income
(In millions)

		Fiscal Quarter Ended September 30, 2006				Fiscal Quarter Ended October 1, 2005
		Issuers	Others	Eliminations	Cons- olidated	Issuers	Others	Eliminations	Cons- olidated
Net sales		$ 624.2	$ 616.9	$ (19.5)	$ 1,221.6	$ 617.5	$ 793.9	$ (98.8)	$ 1,312.6
Licensing income (net)		-	14.4	-	14.4	-	14.9	-	14.9
Service income		-	5.0	-	5.0	-	-	-	-

	Total revenues	624.2	636.3	(19.5)	1,241.0	617.5	808.8	(98.8)	1,327.5
Cost of goods sold		390.8	419.3	(15.1)	795.0	382.7	498.0	(14.6)	866.1

	Gross profit	233.4	217.0	(4.4)	446.0	234.8	310.8	(84.2)	461.4
Selling, general and administrative expenses		212.6	125.1	(3.6)	334.1	191.9	217.0	(87.1)	321.8

	Operating income	20.8	91.9	(0.8)	111.9	42.9	93.8	2.9	139.6
Net interest (expense) income and financing costs		(15.1)	2.9	-	(12.2)	(21.1)	1.6	-	(19.5)
Equity in earnings of unconsolidated affiliates		0.1	0.8	0.2	1.1	0.2	0.3	0.5	1.0

	Income before provision for income taxes and equity in earnings of subsidiaries	5.8	95.6	(0.6)	100.8	22.0	95.7	3.4	121.1
Provision for income taxes		3.9	33.8	0.1	37.8	9.7	34.9	(0.3)	44.3
Equity in earnings of subsidiaries		61.9	-	(61.9)	-	63.2	-	(63.2)	-

	Net income	$ 63.8	$ 61.8	$ (62.6)	$ 63.0	$ 75.5	$ 60.8	$ (59.5)	$ 76.8

		Fiscal Nine Months Ended September 30, 2006				Fiscal Nine Months Ended October 1, 2005
		Issuers	Others	Eliminations	Cons- olidated	Issuers	Others	Eliminations	Cons- olidated
Net sales		$ 1,745.6	$ 1,788.9	$ (53.0)	$ 3,481.5	$ 1,800.0	$ 2,151.8	$ (138.8)	$ 3,813.0
Licensing income (net)		-	35.9	-	35.9	-	40.2	-	40.2
Service income		-	12.9	-	12.9	-	-	-	-

	Total revenues	1,745.6	1,837.7	(53.0)	3,530.3	1,800.0	2,192.0	(138.8)	3,853.2
Cost of goods sold		1,066.0	1,202.0	(40.3)	2,227.7	1,093.5	1,406.9	(41.9)	2,458.5

	Gross profit	679.6	635.7	(12.7)	1,302.6	706.5	785.1	(96.9)	1,394.7
Selling, general and administrative expenses		626.7	373.0	(9.5)	990.2	579.3	502.6	(90.6)	991.3
Loss on sale of Polo Jeans Company business		22.8	22.3	-	45.1	-	-	-	-

	Operating income	30.1	240.4	(3.2)	267.3	127.2	282.5	(6.3)	403.4
Net interest (expense) income and financing costs		(47.3)	7.8	-	(39.5)	(59.9)	3.5	-	(56.4)
Equity in earnings of unconsolidated affiliates		0.4	2.8	(0.3)	2.9	0.4	1.2	1.2	2.8

	Income (loss) before provision for income taxes and equity in earnings of subsidiaries	(16.8)	251.0	(3.5)	230.7	67.7	287.2	(5.1)	349.8
Provision for income taxes		10.6	97.0	(0.5)	107.1	30.6	103.4	(2.8)	131.2
Equity in earnings of subsidiaries		180.5	-	(180.5)	-	182.4	-	(182.4)	-

	Income before cumulative effect of change in accounting principle	153.1	154.0	(183.5)	123.6	219.5	183.8	(184.7)	218.6
Cumulative effect of change in accounting for share-based payments, net of tax		1.9	-	-	1.9	-	-	-	-

	Net income	$ 155.0	$ 154.0	$ (183.5)	$ 125.5	$ 219.5	$ 183.8	$ (184.7)	$ 218.6

Condensed Consolidating Statements of Cash Flows
(In millions)

		Fiscal Nine Months Ended September 30, 2006				Fiscal Nine Months Ended October 1, 2005
		Issuers	Others	Eliminations	Cons- olidated	Issuers	Others	Eliminations	Cons- olidated
Net cash provided by operating activities		$ 84.5	$ 77.7	$ (1.0)	$ 161.2	$ 83.1	$ 18.5	$ -	$ 101.6

Cash flows from investing activities:
	Net proceeds from sale of Polo Jeans Company business	344.1	6.5	-	350.6	-	-	-	-
	Capital expenditures	(39.7)	(75.7)	-	(115.4)	(28.0)	(32.6)	-	(60.6)
	Payments relating to acquisitions	-	-	-	-	(4.2)	-	-	(4.2)
	Other (net)	0.1	-	-	0.1	0.1	(0.3)	-	(0.2)

	Net cash provided by (used in) investing activities	304.5	(69.2)	-	235.3	(32.1)	(32.9)	-	(65.0)

Cash flows from financing activities:
	Net borrowings under credit facilities	61.7	-	-	61.7	309.2	-	-	309.2
	Redemption at maturity of Senior Notes	(225.0)	-	-	(225.0)	(129.6)	-	-	(129.6)
	Debt issuance costs	-	-	-	-	(0.5)	-	-	(0.5)
	Principal payments on capital leases	(1.3)	(1.9)	-	(3.2)	(2.2)	(1.2)	-	(3.4)
	Purchases of treasury stock	(211.9)	-	-	(211.9)	(199.3)	-	-	(199.3)
	Dividends paid	(40.7)	(1.0)	1.0	(40.7)	(38.4)	-	-	(38.4)
	Proceeds from exercise of employee stock options	19.3	-	-	19.3	10.5	-	-	10.5
	Excess tax benefits from share-based payment arrangements	2.3	-	-	2.3	-	-	-	-

	Net cash used in financing activities	(395.6)	(2.9)	1.0	(397.5)	(50.3)	(1.2)	-	(51.5)

Effect of exchange rates on cash		-	0.4	-	0.4	-	(0.7)	-	(0.7)

Net increase (decrease) in cash and cash equivalents		(6.6)	6.0	-	(0.6)	0.7	(16.3)	-	(15.6)
Cash and cash equivalents, beginning		20.3	14.6	-	34.9	12.3	32.7	-	45.0

Cash and cash equivalents, ending		$ 13.7	$ 20.6	$ -	$ 34.3	$ 13.0	$ 16.4	$ -	$ 29.4

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion provides information and analysis of our results of operations for the 13 and 39 week periods ended September 30, 2006 (hereinafter referred to as the "third fiscal quarter of 2006" and the "first fiscal nine months of 2006," respectively) and the 13 and 39 week periods ended October 1, 2005 (hereinafter referred to as the "third fiscal quarter of 2005"and the "first fiscal nine months of 2005," respectively), and our liquidity and capital resources. The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements included elsewhere herein.

Executive Overview

We design, contract for the manufacture of, manufacture and market a broad range of women's collection sportswear, suits and dresses, casual sportswear and jeanswear for women and children, and women's footwear and accessories. We sell our products through a broad array of distribution channels, including better specialty and department stores and mass merchandisers, primarily in the United States and Canada. We also operate our own network of retail and factory outlet stores. In addition, we license the use of several of our brand names to select manufacturers and distributors of women's and men's apparel and accessories worldwide.

During the first fiscal nine months of 2006, the following significant events took place:

in February 2006, we settled the litigation with Polo and sold the Polo Jeans Company business to Polo;
in March 2006, we opened a new Barneys New York flagship store in Boston, Massachusetts;
in May 2006, we announced the closing of our Stein Mart leased shoe departments, effective mid-January 2007,
in May 2006, we announced the closing of our Secaucus, New Jersey warehouse;
in September 2006, we opened a new Barneys New York flagship store in Dallas, Texas; and
in September 2006, we announced the closing of certain El Paso and Mexican production facilities due to Polo's discontinuance of the Polo Jeans Company product line which we produced for Polo subsequent to the sale of the Polo Jeans Company business.

Sale of Polo Jeans Company Business

On January 22, 2006, we entered into a Stock Purchase Agreement with Polo and certain of its subsidiaries with respect to the sale to Polo of all outstanding stock of Sun. We also entered into a settlement and release agreement with Polo to settle the pending litigation between the respective parties, including our former President, upon closing. Gross proceeds of the transactions, which closed on February 3, 2006, were $355.0 million. Sun's assets and liabilities on the closing date primarily related to the Polo Jeans Company business, which Sun operated under long-term license and design agreements entered into with Polo in 1995. We retained distribution and product development facilities in El Paso, Texas, along with certain working capital items, including accounts receivable and accounts payable. In addition, as part of the agreements, we will continue to provide certain support services to Polo (including manufacturing, distribution, information technology and other financial and administrative functions) for a limited period of time.

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Long-lived assets included in the sale included $2.0 million of net property, plant and equipment and $5.5 million of unamortized long-term prepaid marketing expenses. Net sales for the Polo Jeans Company business, which are reported under the wholesale better apparel segment, were $78.4 million for the fiscal quarter ended October 1, 2005 and $24.6 million and $236.1 million for the fiscal nine months ended September 30, 2006 and October 1, 2005, respectively.

Strategic Review

We have completed a strategic review of our operating infrastructure to improve profitability and to ensure we are properly positioned for the long-term benefit of our shareholders. By proactively reviewing our infrastructure, systems and operating processes at a time when the industry is undergoing consolidation and change, we plan to eliminate redundancies and improve our overall cost structure and margin performance.

Supply Chain Management

We are in the process of implementing a product development management system which will ultimately be integrated with our third-party manufacturers.
We are utilizing the capabilities of our third-party manufacturers to increase pre-production collaboration efforts with them, thereby increasing speed to market and improving margins. This has already been achieved in some of the moderate and better apparel businesses, and will continue to be expanded across most of our businesses.
We have selected SAP Apparel and Footwear Solution as our enterprise resource planning system, which will be implemented company-wide utilizing one universal platform.
The logistics network is being analyzed in an effort to reduce costs and increase efficiency by following a tiered approach of (i) multiple product usage of existing distribution centers, (ii) utilizing third party logistics providers, and (iii) ultimately direct shipping from factory to vendor.
In response to the elimination of apparel quotas and other trade safeguards, we are in the process of consolidating our third-party manufacturing to a more concentrated vendor matrix.

General and Administrative Areas

We have completed a review of all general and administrative support areas and will implement best practices in connection with the migration of our current systems to the SAP Apparel and Footwear Solution platform.

The reviews have been completed, and we estimate that the implementation and execution of the initiatives underway will be substantially completed by mid-2008. We are targeting annual savings of approximately $100 million once all the initiatives have been implemented. The costs associated with the review and the ultimate capital expenditures and execution expenses (including severance and fees) related to the initiatives that are derived are expected to fall in a range of $85 million to $95 million. As of September 30, 2006, we have spent a total of $54.1 million.

Restructuring

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On September 12, 2006, we announced the closing of certain El Paso, Texas and Mexican operations related to the decision by Polo to discontinue the Polo Jeans Company product line, which we produced for Polo subsequent to the sale of the Polo Jeans Company business to Polo in February 2006. In connection with the El Paso closing, we expect to incur $3.6 million of one-time termination benefits and associated employee costs for an estimated 111 employees. Of this amount, $0.4 million was reported as a selling, general and administrative expense and $0.1 was reported as a cost of sales in the wholesale moderate apparel segment during the fiscal quarter ended September 30, 2006, and the remaining $3.1 million will be accrued on a straight-line basis over the period each employee is required to render service to receive the benefit. In connection with the Mexican closing, we expect to incur $4.0 million of one-time termination benefits and associated employee costs for an estimated 1,562 employees. During the quarter ended September 30, 2006, we paid $0.3 million to 262 employees, which was recorded as a cost of sales in the wholesale moderate apparel segment; the remaining $3.7 million (for an estimated 1,300 employees) we expect to record in the quarter ended December 31, 2006. We are currently evaluating the related property, plant and equipment for impairment and cleanup costs; any resulting charges will be recorded during the quarter ended December 31, 2006. The closings will be substantially completed by the end of March 2007.

Critical Accounting Policies

Several of our accounting policies involve significant judgements and uncertainties. The policies with the greatest potential effect on our results of operations and financial position include the estimated collectibility of accounts receivable, the recovery value of obsolete or overstocked inventory and the estimated fair values of both our goodwill and intangible assets with indefinite lives.

For accounts receivable, we estimate the net collectibility, considering both historical and anticipated trends of trade discounts and co-op advertising deductions taken by our customers, allowances we provide to our retail customers to flow goods through the retail channels, and the possibility of non-collection due to the financial position of our customers. For inventory, we estimate the amount of goods that we will not be able to sell in the normal course of business and write down the value of these goods to the recovery value expected to be realized through off-price channels. Historically, actual results in these areas have not been materially different than our estimates, and we do not anticipate that our estimates and assumptions are likely to materially change in the future. However, if we incorrectly anticipate trends or unexpected events occur, our results of operations could be materially affected.

We utilize independent third-party appraisals to estimate the fair values of both our goodwill and our intangible assets with indefinite lives. These appraisals are based on projected cash flows and interest rates; should interest rates or our future cash flows differ significantly from the assumptions used in these projections, material impairment losses could result where the estimated fair values of these assets become less than their carrying amounts.

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RESULTS OF OPERATIONS

Statements of Income Stated in Dollars and as a Percentage of Total Revenues

(In millions)	Fiscal Quarter Ended				Fiscal Nine Months Ended
	September 30, 2006		October 1, 2005		September 30, 2006		October 1, 2005
Net sales	$ 1,221.6	98.4%	$ 1,312.6	98.9%	$ 3,481.5	98.6%	$ 3,813.0	99.0%
Licensing income (net)	14.4	1.2%	14.9	1.1%	35.9	1.0%	40.2	1.0%
Service income	5.0	0.4%	-	-	12.9	0.4%	-	-

Total revenues	1,241.0	100.0%	1,327.5	100.0%	3,530.3	100.0%	3,853.2	100.0%
Cost of goods sold	795.0	64.1%	866.1	65.2%	2,227.7	63.1%	2,458.5	63.8%

Gross profit	446.0	35.9%	461.4	34.8%	1,302.6	36.9%	1,394.7	36.2%
Selling, general and administrative expenses	334.1	26.9%	321.8	24.2%	990.2	28.0%	991.3	25.7%
Loss on sale of Polo Jeans Company business	-	-	-	-	45.1	1.3%	-	-

Operating income	111.9	9.0%	139.6	10.5%	267.3	7.6%	403.4	10.5%
Net interest expense	(12.2)	(1.0%)	(19.5)	(1.5%)	(39.5)	(1.1%)	(56.4)	(1.5%)
Equity in earnings of unconsolidated affiliates	1.1	0.1%	1.0	0.1%	2.9	0.1%	2.8	0.1%

Income before provision for income taxes	100.8	8.1%	121.1	9.1%	230.7	6.5%	349.8	9.1%
Provision for income taxes	37.8	3.0%	44.3	3.3%	107.1	3.0%	131.2	3.4%

Income before cumulative effect of change in accounting principle	63.0	5.1%	76.8	5.8%	123.6	3.5%	218.6	5.7%
Cumulative effect of change in accounting for share-based payments, net of tax	-	-	-	-	1.9	0.1%	-	-

Net income	$ 63.0	5.1%	$ 76.8	5.8%	$ 125.5	3.6%	$ 218.6	5.7%

Percentage totals may not add due to rounding.

Fiscal Quarter Ended September 30, 2006 Compared to Fiscal Quarter Ended October 1, 2005

Revenues. Total revenues for the third fiscal quarter of 2006 were $1.24 billion compared to $1.33 billion for the third fiscal quarter of 2005, a decrease of 6.5%.

Revenues by segment were as follows:

(In millions)	Third Fiscal Quarter of 2006	Third Fiscal Quarter of 2005	Increase/ (Decrease)	Percent Change
Wholesale better apparel	$ 320.7	$ 396.7	$(76.0)	(19.2%)
Wholesale moderate apparel	287.4	337.8	(50.4)	(14.9%)
Wholesale footwear and accessories	260.0	262.2	(2.2)	(0.8%)
Retail	357.8	315.9	41.9	13.3%
Other	15.1	14.9	0.2	1.3%

Total revenues	$ 1,241.0	$ 1,327.5	$ (86.5)	(6.5%)

Wholesale better apparel revenues decreased primarily due to the sale of the Polo Jeans Company business ($77.7 million of the decrease) and the discontinuance of our Easy Spirit apparel line. Decreases in shipments of our Jones New York Sport and Jones New York Signature product lines were offset by increased shipments of our Anne Klein and Nine West apparel product lines.

Wholesale moderate apparel revenues decreased primarily due to decreased shipments of our Nine & Co., Norton McNaughton, Bandolino and Joneswear product lines (primarily to J.C. Penney Company, Inc., Sears Holding

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Corporation and Kohl's Corporation) and the discontinuance of the A|Line, C.L.O.T.H.E.S., Joneswear Jeans and Latina product lines (primarily sold at J.C. Penney Company, Inc. and Sears Holding Corporation locations). These decreases were partially offset by increased shipments of our Gloria Vanderbilt and Rena Rowan product lines and shipments of the new private label Duckhead product line.

Wholesale footwear and accessories revenues decreased due to decreased shipments of our Nine West accessory and costume jewelry product lines and our Enzo Angiolini footwear product line (primarily to Federated Department Stores Inc. and Dillard's Inc.) as well as the discontinuance of the Bandolino, l.e.i. and licensed Tommy Hilfiger costume jewelry product lines, partially offset by increased shipments of our Anne Klein and Circa Joan & David footwear product lines.

Retail revenues increased due to both new store openings and an 8.4% increase in comparable store sales. We began the third fiscal quarter of 2006 with 1,072 retail locations and had a net increase of 36 locations during the quarter to end the quarter with 1,108 locations.

Revenues for the third fiscal quarter of 2006 also include $5.0 million of service fees charged to Polo under a short-term transition service agreement entered into with Polo at the time of the sale of the Polo Jeans Company business. These revenues are based on contractual monthly and per-unit fees as set forth in the agreement. Of this amount, $3.2 million was recorded in the wholesale better apparel segment, $1.0 million was recorded in the wholesale moderate apparel segment and $0.8 million was recorded in the licensing and other segment.

Gross Profit. The gross profit margin increased to 35.9% in the third fiscal quarter of 2006 compared to 34.8% in the third fiscal quarter of 2005.

Wholesale better apparel gross profit margins were 35.8% and 34.3% for the third fiscal quarters of 2006 and 2005, respectively. The increase was due to lower levels of sales to off-price retailers and lower levels of air freight partially offset by reduced sales of higher-margin Polo Jeans Company products as a result of the sale of the Polo Jeans Company business.

Wholesale moderate apparel gross profit margins were 21.9% and 19.2% for the third fiscal quarters of 2006 and 2005, respectively. The increase was a result of lower levels of sales to off-price retailers and improved margins in our l.e.i. product line, partially offset by higher levels of air freight.

Wholesale footwear and accessories gross profit margins were 28.9% and 32.5% for the third fiscal quarters of 2006 and 2005, respectively. The decrease was a result of lower net sales in the higher-margin wholesale jewelry business, higher levels of air freight and sales to off-price retailers and writedowns of excess inventory in our direct selling jewelry and accessory business.

Retail gross profit margins were 48.4% and 49.4% for the third fiscal quarters of 2006 and 2005, respectively. The decrease was the result of a higher level of promotional activity in our footwear and accessories stores, liquidation of inventory in the Stein Mart locations and increased sales in our lower-margin Barneys stores in the current period.

Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses of $334.1 million in the third fiscal quarter of 2006 represented an increase of $12.3 million from the $321.8 million reported for the third fiscal quarter of 2005. The increase is primarily due to employee termination and restructuring costs resulting from the strategic review, the opening of new retail stores and higher sample and design costs for footwear products, offset by reductions due to the sale of the Polo Jeans Company business and headcount reductions as a result of the strategic review. SG&A expenses for the third fiscal quarter of 2005 included one-time gains of $5.1 million in the wholesale better apparel segment as a result of a recovery of unauthorized markdown allowances from Saks Incorporated (relating to sales made by Kasper prior to the date of acquisition) and $5.2 million in the retail segment from a landlord repurchase of a retail store operating lease, offset by $1.7 million related to the denim restructuring in the wholesale moderate apparel segment.

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Operating Income. The resulting operating income for the third fiscal quarter of 2006 of $111.9 million decreased $27.7 million from the $139.6 million for the third fiscal quarter of 2005, due to the factors described above.

Net Interest Expense. Net interest expense was $12.2 million in the third fiscal quarter of 2006 compared to $19.5 million in the third fiscal quarter of 2005. The decrease was primarily the result of lower average borrowings and the redemption at maturity of our 7.875% Senior Notes in June 2006.

Provision for Income Taxes. The effective income tax rate was 37.5% for the third fiscal quarter of 2006 and 36.6% for the third fiscal quarter of 2005. The difference was primarily driven by an increase in the state and local effective tax rate.

Net Income and Earnings Per Share. Net income was $63.0 million in the third fiscal quarter of 2006, a decrease of $13.8 million from the net income of $76.8 million earned in the third fiscal quarter of 2005. Diluted earnings per share for the third fiscal quarter of 2006 was $0.56 compared to $0.65 for the third fiscal quarter of 2005, on 4.4% fewer shares outstanding.

Fiscal Nine Months Ended September 30, 2006 Compared to Fiscal Nine Months Ended October 1, 2005

Revenues. Total revenues for the first fiscal nine months of 2006 were $3.53 billion compared to $3.85 billion for the first fiscal nine months of 2005, a decrease of 8.4%.

Revenues by segment were as follows:

(In millions)	First Fiscal Nine Months of 2006	First Fiscal Nine Months of 2005	Increase/ (Decrease)	Percent Change
Wholesale better apparel	$ 887.7	$ 1,125.9	$ (238.2)	(21.2%)
Wholesale moderate apparel	887.4	999.4	(112.0)	(11.2%)
Wholesale footwear and accessories	691.1	748.7	(57.6)	(7.7%)
Retail	1,026.2	939.1	87.1	9.3%
Other	37.9	40.1	(2.2)	(5.5%)

Total revenues	$ 3,530.3	$ 3,853.2	$ (322.9)	(8.4%)

Wholesale better apparel revenues decreased primarily due to the sale of the Polo Jeans Company business ($211.5 million of the decrease) and the discontinuance of our Easy Spirit apparel line. Decreases in shipments of our Jones New York Sport, Jones New York Signature, Kasper and Albert Nipon product lines were partially offset by increased shipments of our Nine West and Anne Klein apparel product lines.

Wholesale moderate apparel revenues decreased primarily due to decreased shipments of our l.e.i., Nine & Co., Norton McNaughton, Bandolino, Energie, Joneswear and Erika product lines (primarily to J.C. Penney Company, Inc., Sears Holding Corporation and Kohl's Corporation) and the discontinuance of our A|Line, Joneswear Jeans, C.L.O.T.H.E.S. and Latina product lines (primarily sold at J.C. Penney Company, Inc. and Sears Holding Corporation locations). These decreases were partially offset by increased shipments of our Gloria Vanderbilt and GLO product lines and increased shipments of private label products, including the new Duckhead product line.

Wholesale footwear and accessories revenues decreased due to decreased shipments of our Nine West accessory and costume jewelry product lines and our Enzo Angiolini and Easy Spirit footwear product lines (primarily to Federated Department Stores Inc. and Dillard's Inc.) as well as the discontinuance of the Bandolino, l.e.i. and licensed Tommy Hilfiger costume jewelry product lines, partially offset by increased shipments of our Anne Klein and Circa Joan & David footwear product lines.

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Retail revenues increased due to both new store openings and a 5.0% increase in comparable store sales. We began the first fiscal nine months of 2006 with 1,086 retail locations and had a net increase of 22 locations during the period to end the period with 1,108 locations.

Revenues for the first fiscal nine months of 2006 also include $12.9 million of service fees charged to Polo under a short-term transition service agreement entered into with Polo at the time of the sale of the Polo Jeans Company business. These revenues are based on contractual monthly and per-unit fees as set forth in the agreement. Of this amount, $8.5 million was recorded in the wholesale better apparel segment, $2.4 million was recorded in the wholesale moderate apparel segment and $2.0 million was recorded in the licensing and other segment.

Gross Profit. The gross profit margin increased to 36.9% in the first fiscal nine months of 2006 compared to 36.2% in the first fiscal nine months of 2005.

Wholesale better apparel gross profit margins were 37.6% and 35.6% for the first fiscal nine months of 2006 and 2005, respectively. The increase was due to lower levels of sales to off-price retailers partially offset by reduced sales of higher-margin Polo Jeans Company products as a result of the sale of the Polo Jeans Company business.

Wholesale moderate apparel gross profit margins were 23.8% and 23.7% for the first fiscal nine months of 2006 and 2005, respectively. Increased margins in our Gloria Vanderbilt product line were offset by higher levels of sales to off-price retailers, higher levels of air freight and excess capacity in our Mexican manufacturing operations.

Wholesale footwear and accessories gross profit margins were 29.6% and 31.6% for the first fiscal nine months of 2006 and 2005, respectively. The decrease was a result of lower net sales in the higher-margin wholesale jewelry business, higher levels of air freight and sales to off-price retailers, markdowns related to the discontinuance of the licensed Tommy Hilfiger jewelry line in the current period and writedowns of excess inventory in our direct selling jewelry and accessory business.

Retail gross profit margins were 49.2% and 50.3% for the first fiscal nine months of 2006 and 2005, respectively. The decrease was the result of a higher level of promotional activity in our footwear and accessories stores and increased sales in our lower-margin Barneys stores in the current period.

Selling, General and Administrative Expenses. SG&A expenses of $990.2 million in the first fiscal nine months of 2006 represented a decrease of $1.1 million from the $991.3 million reported for the first fiscal nine months of 2005. The decrease is primarily due to the sale of the Polo Jeans Company business, headcount reductions as a result of the strategic review and lower levels of advertising in the current period, offset by increased expenses resulting from the opening of new retail stores, $4.3 million recorded in the wholesale better apparel segment in the current period related to the closing of the Secaucus warehouse and $10.0 million recorded in the current period in the wholesale footwear and accessories segment related to the termination of a former executive officer and the settlement of litigation concerning a license agreement. SG&A expenses for the first fiscal nine months of 2006 also included $2.6 million in the retail segment and $0.9 million recorded in the licensing, other and eliminations segment related to the termination of the former executive officer. SG&A expenses for the first fiscal nine months of 2005 included approximately $3.1 million recorded in the wholesale better apparel segment as the result of an arbitration award to a former employee and $1.7 million related to the denim restructuring in the wholesale moderate apparel segment, offset by one-time gains of $5.1 million in the wholesale better apparel segment as a result of a recovery of unauthorized markdown allowances from Saks Incorporated (relating to sales made by Kasper prior to the date of acquisition) and $5.2 million in the retail segment from a landlord repurchase of a retail store operating lease.

Operating Income. The resulting operating income for the first fiscal nine months of 2006 of $267.3 million decreased $136.1 million from the $403.4 million for the first fiscal nine months of 2005, due to the factors described above and the loss on the sale of the Polo Jeans Company business.

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Net Interest Expense. Net interest expense was $39.5 million in the first fiscal nine months of 2006 compared to $56.4 million in the first fiscal nine months of 2005. The decrease was primarily the result of lower average borrowings during the first fiscal nine months of 2006 and the redemption at maturity of our 7.875% Senior Notes in June 2006.

Provision for Income Taxes. The effective income tax rate was 46.3% for the first fiscal nine months of 2006 and 37.5% for the first fiscal nine months of 2005. The difference was primarily driven by the net tax effects associated with the sale of the Polo Jeans Company business and the litigation settlement. Without the effects of the Polo Jeans Company sale and litigation settlement, the effective tax rate for the first fiscal nine months of 2006 was 37.5%.

Cumulative Effect of Change in Accounting for Share-Based Payment. The adoption of SFAS No. 123R required us to change from recognizing the effect of forfeitures of unvested employee stock options and restricted stock as they occur to estimating the number of outstanding instruments for which the requisite service is not expected to be rendered. As a result, we recorded a gain of $1.9 million (net of $1.2 million in taxes) on January 1, 2006 as a cumulative effect of a change in accounting principle.

Net Income and Earnings Per Share. Net income was $125.5 million in the first fiscal nine months of 2006, a decrease of $93.1 million from the net income of $218.6 million earned in the first fiscal nine months of 2005. Diluted earnings per share for the first fiscal nine months of 2006 was $1.10 compared to $1.82 for the first fiscal nine months of 2005, on 5.3% fewer shares outstanding.

LIQUIDITY AND CAPITAL RESOURCES

Our principal capital requirements have been to fund acquisitions, pay dividends, working capital needs, capital expenditures and repurchases of our common stock on the open market. We have historically relied on internally generated funds, trade credit, bank borrowings and the issuance of notes to finance our operations and expansion. As of September 30, 2006, total cash and cash equivalents were $34.3 million, a decrease of $0.6 million from the $34.9 million reported as of December 31, 2005.

Operating activities provided $161.2 million and $101.6 million in the first fiscal nine months of 2006 and 2005, respectively. The difference was primarily due to a smaller increase in accounts receivable in the current period compared to the prior period, primarily as a result of lower wholesale sales in the current period, including the effects of the sale of the Polo Jeans Company business, a higher increase in accounts payable in the current period compared to the prior period, primarily as a result of the timing of inventory receipts in our wholesale footwear business, and a smaller increase in taxes payable in the current period compared to the prior period, primarily as a result of lower estimated federal tax payments in the prior period resulting from tax deductions arising from the Barneys acquisition.

Investing activities provided $235.3 million and used $65.0 million in the first fiscal nine months of 2006 and 2005, respectively. The increase in the current period was primarily due to cash received from the sale of the Polo Jeans Company business, offset by higher capital expenditures (primarily related to new retail stores).

Financing activities used $397.5 million in the first fiscal nine months of 2006, primarily to redeem at maturity our $225.0 million outstanding 7.875% Senior Notes on June 15, 2006, to repay amounts outstanding under our Senior Credit Facilities, to repurchase our common stock and to pay dividends to our common shareholders.

Financing activities used $51.5 million in the first fiscal nine months of 2005. Borrowings under our Senior Credit Facilities were offset by repurchases of our common stock, the payment of dividends to our common shareholders and the redemption at maturity of our $129.6 million outstanding 8.375% Senior Notes due 2005 on August 15, 2005.

We repurchased $211.9 million of our common stock on the open market during the first fiscal nine months of 2006 and $199.3 million during the first fiscal nine months of 2005. As of September 30, 2006, a total of $1.3

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billion had been expended under announced programs to acquire up to $1.4 billion of such shares. We may make additional share repurchases in the future depending on, among other things, market conditions and our financial condition. Proceeds from the issuance of common stock to our employees exercising stock options amounted to $19.3 million and $10.5 million in the first fiscal nine months of 2006 and 2005, respectively.

At September 30, 2006, we had credit agreements with several lending institutions to borrow an aggregate principal amount of up to $1.75 billion under Senior Credit Facilities. These facilities, of which the entire amount is available for letters of credit or cash borrowings, provide for a $1.0 billion five-year revolving credit facility that expires in June 2009 and a $750.0 million five-year revolving credit facility that expires in May 2010. At September 30, 2006, $456.1 million was outstanding under the credit facility that expires in June 2009 (comprised of $191.2 million in cash borrowings and $264.9 million of outstanding letters of credit), and no amounts were outstanding under the credit facility that expires in May 2010. Borrowings under the Senior Credit Facilities may also be used for working capital and other general corporate purposes, including permitted acquisitions and stock repurchases. The Senior Credit Facilities are unsecured and require us to satisfy both a coverage ratio of earnings before interest, taxes, depreciation, amortization and rent to interest expense plus rents and a net worth maintenance covenant, as well as other restrictions, including (subject to exceptions) limitations on our ability to incur additional indebtedness, prepay subordinated indebtedness, make acquisitions, enter into mergers and pay dividends.

At September 30, 2006, we also had a C$10.0 million unsecured line of credit in Canada, under which C$0.2 million of letters of credit were outstanding.

On July 19, 2006, Moody's lowered our senior long term debt rating to Baa3 from Baa2. On July 28, 2006, Standard & Poor's lowered our corporate credit rating to BBB- from BBB. At the time of these respective downgrades, we remained under review by both rating agencies. On October 16, 2006, Moody's completed its review, confirming their Baa3 rating and assigning us a stable outlook. Standard & Poor's is continuing its review. These downgrades will increase the margin over the floating interest rate charged under our Senior Credit Facilities and could impact our cost of accessing the capital markets in the future.

On October 25, 2006, we announced that the Board of Directors had declared a quarterly cash dividend of $0.14 per share to all common stockholders of record as of November 17, 2006 for payment on December 1, 2006.

We have two joint ventures with HCL Technologies Limited to provide us with computer consulting, programming and associated support services. As of September 30, 2006, we have committed to purchase $1.0 million in services from these joint venture companies through June 30, 2007.

We also have a joint venture with Sutton Developments Pty. Ltd. ("Sutton") to operate retail locations in Australia. We have unconditionally guaranteed up to $7.0 million of borrowings under the joint venture's uncommitted credit facility and up to $0.4 million of presettlement risk associated with foreign exchange transactions. Sutton is required to reimburse us for 50% of any payments made under these guarantees. At September 30, 2006, the outstanding balance subject to these guarantees was approximately $0.7 million.

We believe that funds generated by operations, proceeds from the issuance of notes, the Senior Credit Facilities and the Canadian line of credit will provide the financial resources sufficient to meet our foreseeable working capital, dividend, capital expenditure and stock repurchase requirements and fund our contractual obligations and our contingent liabilities and commitments.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The market risk inherent in our financial instruments represents the potential loss in fair value, earnings or cash flows arising from adverse changes in interest rates or foreign currency exchange rates. We manage this exposure through regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Our policy allows the use of derivative financial instruments for identifiable market risk exposures, including interest rate and foreign currency fluctuations. We do not enter into derivative financial contracts for trading or other speculative purposes.

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The primary interest rate exposures on floating rate financing arrangements are with respect to United States and Canadian short-term interest rates. We had approximately $1.75 billion in variable rate credit facilities at September 30, 2006.

We are exposed to market risk related to changes in foreign currency exchange rates. We have assets and liabilities denominated in certain foreign currencies and purchase products from foreign suppliers who require payment in funds other than the U.S. Dollar. We believe that these financial instruments should not subject us to undue risk due to foreign exchange movements because gains and losses on these contracts should offset losses and gains on the assets, liabilities, and transactions being hedged. We are exposed to credit-related losses if the counterparty to a financial instrument fails to perform its obligation. However, we do not expect the counterparties, which presently have high credit ratings, to fail to meet their obligations.

For further information see "Derivatives" in the Notes to Consolidated Financial Statements.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Exchange Act Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that both our disclosure controls and procedures and our internal controls and procedures are effective in allowing timely decisions by management regarding disclosure of material information required to be included in our periodic SEC filings and that information required to be disclosed by us in these periodic filings is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that our internal controls are effective to provide reasonable assurance that our financial statements are fairly presented in conformity with generally accepted accounting principles.

Changes in Internal Control Over Financial Reporting

We are in the process of implementing SAP, an enterprise resource planning ("ERP") system, throughout Jones Apparel Group, Inc. and our consolidated subsidiaries. SAP will integrate our operational and financial systems and expand the functionality of our financial reporting processes. During the fourth quarter of 2006, we expect to begin the implementation phase, which we expect to roll out to all locations over a multi-year period. As the phased roll out occurs, we will experience changes in internal control over financial reporting each quarter. We believe that we are adequately controlling the transition to the new processes and controls and that there should be no negative impact to our internal control environment. We expect this ERP system to further advance our control environment by automating manual processes, improving management visibility and standardizing processes as its full capabilities are utilized.

There have been no changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We have been named as a defendant in various actions and proceedings arising from our ordinary business activities. Although the amount of any liability that could arise with respect to these actions cannot be accurately predicted, in our opinion, any such liability will not have a material adverse financial effect on us.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

The following table sets forth the repurchases of our common stock for the fiscal quarter ended September 30, 2006.

Issuer Purchases of Equity Securities

Period	(a) Total Number of Shares (or Units) Purchased	(b) Average Price Paid per Share (or Unit)	(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
July 2, 2006 to July 29, 2006	-	-	-	$181,037,215
July 30, 2006 to August 26, 2006	1,310,000	$30.14	1,310,000	$141,547,582
August 27, 2006 to September 30, 2006	1,500,000	$31.50	1,500,000	$94,299,742
Total	2,810,000	$30.87	2,810,000	$94,299,742

These repurchases were made under a program announced on February 15, 2006 for $250.0 million. This program has no expiration date.

Item 5. Other information

Statement Regarding Forward-looking Disclosure

This Report includes, and incorporates by reference, "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements regarding our expected financial position, business and financing plans are forward-looking statements. The words "believes," "expects," "plans," "intends," "anticipates" and similar expressions identify forward-looking statements. Forward-looking statements also include representations of our expectations or beliefs concerning future events that involve risks and uncertainties, including:

those associated with the effect of national and regional economic conditions;
lowered levels of consumer spending resulting from a general economic downturn or lower levels of consumer confidence;
the performance of our products within the prevailing retail environment;
customer acceptance of both new designs and newly-introduced product lines;
our reliance on a few department store groups for large portions of our business;
consolidation of our retail customers;
financial difficulties encountered by customers;
the effects of vigorous competition in the markets in which we operate;

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our ability to identify acquisition candidates and, in an increasingly competitive environment for such acquisitions, acquire such businesses on reasonable financial and other terms;
the integration of the organizations and operations of any acquired businesses into our existing organization and operations;
our reliance on independent foreign manufacturers;
changes in the costs of raw materials, labor, advertising and transportation;
the general inability to obtain higher wholesale prices for our products that we have experienced for many years;
the uncertainties of sourcing associated with the new environment in which general quota has expired on apparel products (while China has agreed to safeguard quota on certain classes of apparel products through 2008, political pressure will likely continue for restraint on importation of apparel);
our ability to successfully implement new operational and financial computer systems; and
our ability to secure and protect trademarks and other intellectual property rights.

All statements other than statements of historical facts included in this Report, including, without limitation, the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such expectations may prove to be incorrect. Important factors that could cause actual results to differ materially from our expectations ("Cautionary Statements") are disclosed in this Report in conjunction with the forward-looking statements. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Cautionary Statements. We do not undertake to publicly update or revise our forward-looking statements as a result of new information, future events or otherwise.

Item 6. Exhibits

See Exhibit Index.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

JONES APPAREL GROUP, INC.
(Registrant)

Date: October 27, 2006

By /s/ Peter Boneparth
PETER BONEPARTH
Chief Executive Officer

By /s/ Efthimios P. Sotos
EFTHIMIOS P. SOTOS
Chief Financial Officer

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EXHIBIT INDEX

Exhibit No.	Description of Exhibit
31*	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32^o	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

____________
* Filed herewith.
^o Furnished herewith.

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