Jos A. Bank Warns On Earnings; We're Not Touching This Stock

May.21.13 | About: Jos. A. (JOSB)

Troubled suit seller Jos A. Bank (NASDAQ:JOSB) warned earlier this morning that its first-quarter earnings per share were going to fall in the $0.27-$0.30 range, which is well below the consensus estimate of $0.46 per share. This range is also well below the company's first quarter earnings of $0.53 per share in fiscal year 2012.

Management readily blamed lower average selling prices and higher input costs as weighing on margins, but we also think the company is having a hard time competing in the suit retail business. In our view, customers simply do not want the firm's suits unless the value element is incredibly compelling. We also think the company missed a huge opportunity as the American suit landscape shifted in favor of slimmer, more European cuts. During this monumental shift, Jos A. Bank has remained mostly stocked with wider, classic cuts that younger consumers in particular aren't demanding.

On the positive side, we think management realizes how badly it missed the mark. President and CEO Neal Black was quoted in the press release as saying:

"For the remainder of 2013, we will continue to focus on our goal of returning to previous levels of gross margin rates and advertising productivity. As such, we will continue to test, evaluate and refine our merchandising and advertising offerings to optimize the appeal to our customers. Additionally, starting this spring, we have introduced new and more focused casual assortments and additional slim-fit suit inventories responding to customer demand."

However, we're a bit worried that the firm won't be able to return to its previous gross margin rates after the heavy amount of promotional activity it has taken in the past several months. Even if Jos A. Bank's inventory mix improves, we aren't sure the company will be able to drive sales growth without the aid of substantial promotions. Competitor Men's Wearhouse (MW) has meaningfully improved its product mix during the past year, but intense competition from the likes of Macy's (NYSE:M) and h&m tempered same-store sales growth to 1% in the most recent quarter.

The suit selling business has become more competitive during the past few years as we've seen something of a renaissance in men's formal wear, giving the old previous leaders like Jos A. Bank and Men's Wearhouse less of a stranglehold on the market. Given Jos A. Bank's struggles during the back half of fiscal year 2012, we aren't surprised to see the firm warn on profitability. We believe shares of the retailer look fairly valued at this time, and we'd need to see an improvement in the company's fundamentals before getting excited about the name.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.