Late Friday night, suit retailer Jos. A. Bank (JOSB) used a common tactic to report bad news, revealing in an 8-K that net income for 2012 will be approximately 20% lower than it was in 2011.
Some simple mathematical calculations reveal that the figure will lead to lower EPS in not only 2011, but also below what the firm reported in 2010. Although we're sure SG&A has increased as a percentage of sales, we think the terrible results are the product of compressing gross margins. The firm is famous for its "Buy 1, Get 2 Free" marketing, though it sometimes extends to buying one suit for a free shirt, tie, socks, and other accessories. While Jos. A. Bank likes to portray these deals as a bargain for the customer, we think consumers are wise enough to see past the marketing gimmickry and purchase lower-priced suits from The Men's Wearhouse (MW) to Macy's (M).
On top of deteriorating margins, it appears sales are not growing at a satisfactory pace, though the firm says sales will top $1 billion for the first time in the company's history. In its 8-K, the company provided a laundry list of excuses:
The fourth quarter started out slowly, as the first two weeks of fiscal November were negatively impacted by the aftermath of Hurricane Sandy, the distractions created by the presidential election and the uncertainty of the fiscal cliff.
Yes, other retailers blamed Hurricane Sandy, but retail seemed relatively unaffected by the presidential election, as well as fiscal cliff uncertainty, assuming execution was solid. We warned that margins weren't looking good heading into the fourth quarter, and it appears our fears have surfaced.
We have reduced our fair value estimate for the company, and we would stay away from shares at its current valuation and bearish technicals. It would take an enormous fundamental turnaround to get excited about the name for the portfolio of our Best Ideas Newsletter.