Bear Of The Day: Men's Wearhouse

Sep.24.13 | About: Tailored Brands, (TLRD)

What's happening in the world of men's discount dress wear? Two stores I have shopped at for years are frequenting the bottom of the barrel in the Zacks Rank lately.

First, it was Jos. A. Bank Clothiers (NASDAQ:JOSB) in early summer with an earnings miss and cloudy guidance. I had always wondered how JOSB could offer such big discounts with "buy one, get three free" types of store sales. My speculation was that the shirt they charge $80 for is made for under $10 in China.

This month, it appears as if declines in consumer spending are taking their toll on the outlook of Men's Wearhouse (MW). On Sept. 11, the company posted adjusted Q2 earnings of $1.01 per share that missed the Zacks Consensus Estimate of $1.15 and decreased 12.2% year over year. Including one-time items, earnings came in at 85 cents per share.

Citing macroeconomic challenges, Men's Wearhouse lowered its fiscal 2013 guidance. Shares of this specialty retailer of menswear in the United States and Canada plunged more than 14% the next day. Analysts who had actually been raising estimates before the end of the second quarter were sent scrambling the other way, taking this year's EPS in the past two weeks down to $2.44 from $2.77, and 2014 down to $2.82 from $3.02. The most recent notches down in estimates last week caused MW to drop from a Zacks No. 3 Rank (Hold) to a No. 5 Rank (Strong Sell) this week.

Details of the Decline

Revenues decreased 2.3% year over year to $647.3 million and missed the Zacks Revenue Estimate of $675 million. Retail Segments total revenue (representing 91.7% of total sales) decreased 1.9% year over year to $593.4 million, reflecting a 1.1% decrease in Retail Clothing Product to $408.7 million, coupled with a 4.2% decline in Tuxedo Rental Services to $147.7 million. Alteration and other services division’s sales decreased 1.3% to $37.1 million.

Corporate Apparel Segment’s (representing 8.3% of total sales) revenue declined 6.6% to $53.8 million. The company stated that the shift in tuxedo revenues and the deleveraging of occupancy costs affected margins during the quarter. Consolidated gross profit decreased 3.6% to $308.8 million, while gross profit margin contracted 65 basis points year over year to 47.7%. Operating income plunged 27.1% to $66.8 million, while operating margin contracted 351 basis points to 10.3%.

Causes in Question

These results and management's outlook caused the company to lower its fiscal 2013 earnings guidance. They now expect earnings per share to be in the range of $2.40-$2.50 for 2013, down from its earlier guidance range of $2.70-$2.80. The company also lowered its comps growth rate by 2% at Men's Wearhouse and Moores. If MW management wants to blame macroeconomic factors, they have a lot of company amid the "triple-A" amigos of retail fashion -- Aeropostale (NYSE:ARO), American Eagle (NYSE:AEO), and Abercrombie & Fitch (NYSE:ANF), all of which bombed recently and fell to No. 5 Ranks.

One driver may be that the clothing market has become so competitive, with sale after sale causing retailers to undercut each other and their own margins. But if consumer spending overall were taking a nosedive, we would see it in a lot more places, from employment data and manufacturing surveys to consumer confidence and even the price performance of the XLY sector ETF, one of the leaders this year and throughout the bull market.

I think that some retailers just eventually go "out of fashion" and can't compete on price alone with a Michael Kors (NYSE:KORS) brand. But a possible "macro" explanation may be a short-term shift in consumer spending toward bigger ticket items caused by a unique combination of rising home equity values and sales -- the wealth effect -- and the rise in interest rates motivating consumers to "buy now" (cars, appliances, and other durables) while interest rates are low.

I'll offer one more theory about MW and JOSB. Maybe there is a trend more toward casual wear and less toward suits at work. In my industry, all it takes is a bulge bracket bank to lay off 5,000 "suits" -- which seems to happen at least once a quarter -- and you see a lot less of them downtown. I just hope JOSB and MW right the ship soon and don't go out of business. While I prefer to buy Kors and Ted Baker ties, I love Pronto Uomo shirts, especially when I can get them on sale at MW.

Abercrombie: Free Stock Analysis Report (email registration required)

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Jos. A. Bank: Free Stock Analysis Report (email registration required)

Michael Kors: Free Stock Analysis Report (email registration required)

Men's Wearhouse: Free Stock Analysis Report (email registration required)