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Jos. A Bank Clothiers (NASDAQ:JOSB)

Q3 2013 Earnings Call

December 05, 2013 11:00 am ET

Executives

David E. Ullman - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

R. Neal Black - Chief Executive Officer, President and Director

Analysts

Mark K. Montagna - Avondale Partners, LLC, Research Division

David M. Mann - Johnson Rice & Company, L.L.C., Research Division

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Brian J. Tunick - JP Morgan Chase & Co, Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Third Quarter 2013 Earnings Conference Call for Joseph A. Bank. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. David Ullman, CFO. Please go ahead.

David E. Ullman

Good morning, everybody. This is David Ullman, and I'm joined by Neal Black, our President and CEO.

Before I begin, let me start with the usual script. Our statements concerning future operations contained on this call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

When used in this presentation, the words estimate, project, plan, will, anticipate, expect, intend, outlook, may, believe, goal, attempt, assume, potential, should and other similar expressions are intended to identify forward-looking statements and information. Actual results may differ materially from those forecasted due to a variety of factors outside of our control that can affect our operating results, liquidity and financial condition.

Such factors include risks associated with domestic and international economic activity and inflation, weather, public health and other factors affecting consumer spending, including negative changes to consumer confidence and other recessionary pressures; higher energy and security costs; the successful implementation of our growth strategy, including our ability to finance our expansion plans; the mix and pricing of goods sold; the effectiveness and profitability of new concepts; the market price of key raw materials, such as wool and cotton; and other production inputs such as labor costs; seasonality; merchandise trends and changing consumer preferences; the effectiveness of our marketing programs, including compliance with relevant legal requirements; the availability of suitable lease sites for new stores; doing business on an international basis; the ability to source product from our global supplier base; legal and regulatory matters; and other competitive factors.

The identified risk factors and other factors and risks that may affect our business or future financial results are detailed in our filings with the Securities and Exchange Commission, including, but not limited to, our annual report on Form 10-K for fiscal year 2012, and our quarterly reports on Form 10-Q filed through the date hereof. These risks should be carefully reviewed before making any investment decisions. These cautionary statements qualify all of the forward-looking statements we will make on this call. We cannot assure you that the results or developments anticipated by us will be realized, or even if substantially realized, that those results or developments will result in the expected consequences for us or affect us, our business or our operations in the way we expect.

We caution you not to place undue reliance on these forward-looking statements, which speak only as of their respective dates. We do not undertake an obligation to update or revise any forward-looking statements to reflect actual results or changes in our assumptions, estimates or projections.

The following presentation includes information regarding interim period sales in the current quarter. These interim period sales are not necessarily indicative of sales expected for the full quarter. Furthermore, sales are just one component of earnings, and no projection of earnings should be inferred from any discussion of interim period sales or other data in this presentation.

Now with that said, as usual, I will begin our prepared remarks this morning with an overview of our financial performance in the third quarter of 2013. Some of which we preannounced a few weeks ago, and I am pleased to say that we came in at the top end of the range we announced. Following that, our CEO, Neal Black, will provide additional color on the third quarter results, an early read on Q4 performance and an update on our business initiatives.

At that time, we will open our call to a live question-and-answer session, in which we will both participate. When we finish our prepared remarks, the operator will give instructions about how you may ask a question if you wish to do so.

With that, let me begin.

Our adjusted earnings for the third quarter of fiscal year 2013 were $0.51 per diluted share, representing an increase of 9% over the 47% -- $0.47 per diluted share reported in the third quarter of last year. The adjusted earnings per diluted share include the add back of approximately $1.2 million of expense of legal and other professional services related to our acquisition proposal for Men's Wearhouse. On a GAAP basis, earnings per diluted share were $0.49 in the third quarter of 2013, which is also an increase over last year, including the $1.2 million of expense for legal and other professional services.

We're pleased to see significantly improved sales trends in the third quarter. Our total sales grew by more than 6%, including a 23.5% gain in Direct Marketing sales. Also worth noting, at the same time as we posted higher sales, we were also able to generate a 40 basis point increase in our gross profit margin rate. This represents the second consecutive quarter in which the gross profit rate increased after declining for 8 quarters. To give some more specifics, for the third quarter of 2013, total sales were $247.5 million, which is a gain of 6.3% compared to sales of $232.9 million in the year-ago third quarter. Comparable store sales were essentially flat in the quarter with a decline of 0.1%, primarily as a result of reduced traffic, while dollars per transaction were up. More importantly, our combined comparable store and Internet sales grew 2.4% reflecting strength in our omni-channel business model. As we have entered the critical fourth quarter of 2013, our sales increased in the month of November, which Neal will discuss in greater detail in a few moments.

As I mentioned, the gross profit margin rate increased 40 basis points to 57.4% in the third quarter of 2013 with approximately half of the gain attributable to lower sourcing costs and the remainder related to higher average selling retails and greater leverage in our alteration services.

The increase in the average selling retails occurred despite generating an increase in sales of seasonal clearance products as a result of weaker-than-expected sales in some previous quarters. Sales and marketing costs increased $6.9 million in the third quarter of 2013 to $100.3 million. The increase stems mostly from the higher sales compared to last year as well as occupancy, selling payroll, benefit costs and other variable costs related to the net addition of 41 stores since the year-ago third quarter. The increase in these sales and marketing costs was partially offset by approximately $700,000 of lower advertising costs reflecting an increase in the Direct segment and a decrease in the Stores segment.

The G&A costs for the third quarter of 2013 were $2.2 million higher than in the third quarter of 2012 at $19.3 million, mostly attributable to approximately $1.2 million of costs related to our acquisition proposal for Men's Warehouse mentioned earlier, and approximately $700,000 related to corporate payroll and benefit cost. Despite the higher pretax profit, our tax expense was essentially flat at $8 million in the third quarter of 2013 compared to the third quarter of 2012, primarily due to a lower -- slightly lower tax rate.

Looking at our inventory at the end of October 2013, it shows a decrease of $11 million or approximately 3% compared to the same time last year. This lower inventory level reflects a reduction in our purchases based on the weak sell-throughs we had in certain seasonal categories last year, as well as some lower per-unit inventory costs. We believe that we have a good balance of inventory to support our sales plans for the fourth quarter of 2013.

We deployed approximately $22.1 million of cash or capital expenditures in the first 9 months of 2013. This went towards the opening of 28 new stores, the relocation and renovation of a number of existing stores, payments for stores opened and projects completed in fiscal year 2012, which were invoiced to us and paid in fiscal year 2013. And lastly, the implementation of certain systems and infrastructure projects, including the expansion of our distribution capacity and the project to upgrade our POS system. We are on track to invest approximately $35 million to $36 million on capital expenditures for the full year of 2013 which is net of any carryover payments into 2014. This will cover the opening of approximately 30 new stores for the full year and the other items I just mentioned.

At this time, I will turn the call over to Neal Black, our President and CEO.

R. Neal Black

Thanks, Dave, and good morning, ladies and gentlemen. Let me begin with my view of our financial performance for the third quarter and the trends we have seen since the end of the quarter, and then I'll get into some operational detail.

As Dave discussed, our sales gains in the third quarter at 6% were solid and we're very encouraged as we execute our plans for the critical fourth quarter. We attribute this sales turnaround to the implementation of the initiatives we discussed previously. We performed an exhaustive analysis of our marketing program which has resulted in the ongoing modifications of our strategy for the high-volume promotional events, including a different approach to our media buying and multiple-revised creative advertising formats. We also focused on increasing the day-to-day sales in the nonpromotional part of our business through the continued development of our Making it WORK value price campaign. Sales from this nonpromotional part of the business represented approximately 40% of merchandise sales in the third quarter and posted stronger sales gain in the rest of merchandise offerings in the chain, along with an increasing gross profit margin. We plan to continue to build on this success.

As we have entered the fourth quarter, we are only 4.5 weeks in. We are seeing that our total sales, comparable store sales and direct sales have all increased substantially, so the fourth quarter is off to a very good start. We're particularly happy with our strong sales in week 4 of November which includes Thanksgiving and Black Friday, and also the first week of December so far which includes Cyber Monday. Customers really responded to our combination of fresh and timely product offerings, strong door-buster pricing and compelling values throughout the store. And we achieved these strong sales without deterioration in the efficiency of our advertising spending and without a deterioration of our gross profit margin rate.

But it is still early in the quarter and, of course, December is the largest month of the quarter and the year. There are some particular dynamics impacting it this year since Thanksgiving fell on the latest possible date in November, there are the smallest number of possible shopping days between Thanksgiving and Christmas, making each day in December more important than in prior years. In addition, we are also annualizing a 53-week year in fiscal 2012 which causes a shift in the fiscal calendar, as well as one less week of sales in the fourth quarter. But again, we're off to a great start.

Our Direct Marketing segment, as Dave discussed, was very strong in the third quarter with a 23% sales gain which is on top of a 26% sales gain in the year-ago period. Again, timely product offerings and strong promotional pricing are the winning combination. And we continue to see Direct as a very important component of our total business. And we feel there's even more ground that can be won online. We are constantly working to drive traffic and increase conversion rates once we have a customer on our site. Profitability online improved in the quarter, primarily as a result of the benefits of our enhanced search engine optimization process that I outlined last quarter.

As we look ahead, we are working diligently to build on our progress by improving our marketing strategies in order to best and most productively support our stores and online businesses. Another positive note I should share is that our proprietary database of active customers for both stores and online grew 8% in the third quarter compared to the same time last year, which brings us to well over 4 million active customers. We continue to attract new customers and we recognize the opportunity this offers to build our business with them and maximize their lifetime value. We're working aggressively to capture new customers with the goal of increasing frequency of repeat visits, number of items purchased and higher average unit sales.

Now let me provide some insight into our merchandising gross margin trends. Our trend in the gross profit margin rate is encouraging, as Dave told you. The gross profit margin rate was up 40 basis points in the third quarter, and we believe the gross profit margin rate declines may have bottomed out and have the potential to move up as we annualize significant declines in the next 2 quarters. Our objective is to return to a gross margin rate that is more consistent with our pre-2012 levels and we feel we're on the path to get there, though it is too early to give a more specific target on the timing.

In the third quarter of 2013, suits had a strong increase in unit sales while sportswear unit sales were flat and other clothing and dress shirt unit sales declined. The increase in suit unit sales was primarily driven by an increase in Slim Fit suit sales and an increase in Big, Tall and Regal sizes. I mentioned that we sold less dress shirt units. We are however, pleased with this trend since the sales dollars and margin dollars have improved in dress shirts as part of our plan to increase the penetration of nonpromotional part of our business. So just to be clear, I'll repeat, suits sales were down in units but up in sales dollars and gross margin dollars due to higher average selling prices.

David E. Ullman

That was shirts.

R. Neal Black

I'm sorry, shirts. And that's a very good sign regarding the strength of our assortment in shirts. While suits sold well in the quarter, the other tailored clothing did not. We have been working hard to showcase improved business casual assortments, but we didn't get the traction that we were hoping for in the third quarter. However, parts of the business casual assortment really picked up in late November, perhaps as the weather got colder and we're now encouraged as we head towards Christmas. As we have said in the past, controlling merchandise cost without deterioration of the quality our customers expect from us is a top priority. As we mentioned on some recent calls, we expect our product cost to decline modestly through the end of 2013. However, cost declines are not directly following the declines in the commodity prices of raw materials, increases in other costs such as manufacturing labor and currency valuations are offsetting some of the commodity declines. For 2014, we see price volatility in the cotton market again with prices up for some delivery cycles and we're working our way through that. Our focus is, as always, continuing to seek the lowest costs in the world for the high qualities that we demand.

While maximizing the performance of our existing business is a foremost priority, we remain focused on our 5 key internal growth initiatives. Let me give you an update on where we are in each of them. Number one, our website. Beyond our search engine optimization work, we believe there is continued sales expansion potential through mobile, social marketing and our affiliate programs and international expansion. We're finding the Internet to be a great source for acquiring new customers and we have had good success with retaining these customers to purchase in multiple channels of our business. While international is only a small portion of our direct sales, it continues to grow and we have shipped to almost 90 countries, up from over 70 last quarter. We see even greater potential in the future for international. And as we pursue Internet sales growth, we're working hard to improve the productivity of our marketing spend.

Number two, our tuxedo rental program continues to grow since we launched it in early 2010. We are pleased with our spring prom season this year, which occurs mostly in the second quarter, making it a seasonal peak for the business. Rentals in the third quarter were flat with a slight increase in profitability in the quarter. We think we can do better than this and we're taking a hard look at our tuxedo marketing programs going forward. During this recent period, we've been highly focused on the core business and the related core business marketing. Now that its productivity is improving, we'll begin to refocus on the growth in tuxedos. At this time, our tuxedo rental business is not big enough to report separately and our core business still accounts for the vast majority of our sales.

Number three, our special sizes continue to be an important opportunity for us as We Can Fit Almost Everyone with a good portion of the business coming from our Direct Marketing segment. This reflects our ability to showcase our broad range of sizes and fits online. With Traditional, Tailored, Slim and Regal fits and Big and Tall size extensions, we manufacture the products and control the sizing, so there can be no doubt that We Can Fit Almost Everyone.

I already pointed out the strength in Slim Fit suits, Regal fit suits and Big and Tall sizes in the third quarter. Every quarter, we are acquiring new customers and building new business in these areas.

Number four, our Factory Stores. We opened 8 more new Factory Stores this year which completes the new Factory Store openings for the year. These 8 new stores bring us to a total of 43 Factory Stores. And 100 Factory Stores remains our target. The Factory Store business continues to help us attract new customers with a different profile who are not shopping in our Full-line stores. Sales increased in Factory Stores in the third quarter, while the gross profit margin rate declined somewhat as we used this channel to move excess clearance goods from prior seasons. We expect the gross profit margin in the factory channel to grow in the future as we refine the mix of clearance and new manufactured products.

Number five, our Full-line stores. We expect to open approximately 22 new Full-line stores in fiscal 2013, including 1 or 2 stores that will open in the fourth quarter. We remain focused on our core strategy of opening stores in convenient locations in new and existing markets on lease terms that fit our stringent criteria. Combined with our new Factory Stores, this will bring our total number of stores to approximately 630 by the end of the year, marking the increase of approximately 4% in our retail square footage. And I can confirm that our plan to open stores at roughly the same pace in 2014, bringing us closer to our goal of operating approximately 800 stores nationwide, including approximately 700 Full-line stores and 100 Factory Stores.

So in these 5 areas, we see growth potential for the business. Importantly, they each enable us to leverage the 4 pillars that have been constant in our business since our team arrived in 1999. Commitment to quality achieved through aggressively managed worldwide sourcing, dedication to service, being in stock with a high-quality product mix, and delivering product innovation while maintaining our classic style position.

Now moving ahead. While the current business trends have been stabilizing and showing renewed strength, we will continue to be proactive in growing the core business and we have a plan to return the company to a strong earnings trajectory. As we do that, we will also be pursuing an acquisition strategy that would enable us to leverage the core strength of our operating team and the infrastructure that we have built. Before we open the call for your questions, I wanted to address the topic of Men's Wearhouse. As you know, in early October, Joseph A. Bank put forward a proposal to acquire Men's Wearhouse for what we saw is a very fair price, a 42% premium to where their shares have been trading. And we even subsequently said that we will be willing to discuss a potentially higher price if the Men's Wearhouse board would be willing to provide us the opportunity for limited due diligence and enter into good faith discussions. They rejected our initial proposal and then didn't respond to us. We then remained consistent with our statements to the market and terminated our proposal. Though we said we would be willing to discuss a transaction again if the circumstances made sense. Last week, we received an unsolicited nonbinding proposal -- acquisition proposal from Men's Wearhouse. So despite the fact that they would not engage in discussions with us before, it seems they now agree that a combination of our companies make sense. We immediately responded that our Board of Directors would evaluate the proposal from Men's Wearhouse with the assistance of our financial and legal advisers and respond in due course. I can tell you that work is underway but I cannot give you a time line of when that work will be completed to enable us to give a thoughtful response. I can assure you that we want to act expeditiously with the sole goal of delivering increased value for our shareholders, but not at the expense of distracting our management team during the most crucial selling period.

It is important to be aware that Men's Wearhouse is not the only potential opportunity for us. Under the leadership of our Chairman, Bob Wildrick, we have been surveying the marketplace for acquisitions for some time. As a result, there are several potential acquisition candidates we are evaluating that could meet our criteria. Of course, we cannot provide specific information about such candidates, but we can tell you that the key criteria that we use in our evaluations are: number one, the strategic fit with our business; number two, the ability to leverage our core competencies; and number three, the accretion and opportunities for synergies that would allow us to drive substantial value creation over the long term. I cannot provide a time line for you in terms of our efforts, but I assure you, we are being very diligent and deliberate in our work to this end. So to be clear, even as we pursue this path, our management team remains keenly focused on continuing to grow our core business and we're looking forward to being a strong competitor this holiday season and continuing to generate improvement in our performance.

With that said, just before we take your questions, let me note that we have received very favorable feedback from the financial community about our enhanced shareholder outreach and communication and we remain committed to that approach. In that regard, we ask you to limit your questions to our operational and financial results, and the general performance of and plans for the core business. Given the questions we anticipated about Men's Wearhouse, I felt it was important to share our thinking in our prepared remarks, and I have said most everything that can be said publicly at this time. And we appreciate your cooperation, and thanks in advance. Finally, before I close this portion of the call, let me say that our management and board are dedicated to our roles as stewards of this company and its capital for the benefit of all our shareholders. We feel very good about our core business and its recent performance, and remain committed to taking actions that will deliver increased value for our shareholders. With that, operator, please open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we have a question from the line of Mark Montagna with Avondale Partners.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Hopefully, I'm not going to be repeating any questions but I was on music-hold for about 11 minutes before I actually got on the call, so apologies upfront. But first, just really want to congratulate you guys on your efforts to make such an impressive acquisition and actually take the -- your efforts of shareholder enhancements so seriously. Then aside from that, a question on suits. It sounds like suits are up strongly, but not shirts and ties. And I understand the dynamic on the dollars of those. But is the weakness in shirts and ties due to a lack of add-on sales to the suits, or due to the guy -- not as many guys coming in just to buy shirts and ties without a suit?

R. Neal Black

Mark, I don't think that we're that far off from our traditional ratios of suits and ties to shirts. That's an area that we're always trying to enhance by building items per transaction. We have been more aggressive in pricing in the suits category than in the shirts. We looked at shirts as a margin building opportunity. And to have the result of increased dollar sales and gross margin dollars at lower units, to us, is a terrific sign about the quality of our assortment and our ability to move everything in that direction over time, which helps us recover some of the gross margin rate declines that we've had over the last few years. So it's quite deliberate and we're very positive about the outcome.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. And then for November, it sounds like you're doing really well. And I'm assuming one of your top categories has to be winter coats and winter accessories given the cold weather and the easy comparisons. Is that fair to assume that?

R. Neal Black

It's been much colder, and the cold weather is a component of the sales. But it's not the entire reason. We've had strength in a lot of categories. I never get very specific in our forward-looking comments on our sales other than to give you some directional comments on the totals. But I can say that cold weather is better than last year, thanks to the cold weather, and -- but it's not the only thing that's happening.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. All right. And then you have the program, the works. And I'm wondering, what is your -- do you have a specific goal in terms of percent of sales of the works over some specific time line? And where is the works in terms of percent of sales right now and where was it last year?

R. Neal Black

Well, at this time last year, we were only beginning to test the concept of consistent value pricing on certain products so it was a low penetration. It's running -- we've dedicated about 40% of our inventory and it's achieving a little better ratio in the sales through the third quarter. And I think we're going to stay there for the next reasonable amount of time because the promotional part of our business, which is the other 60%, still represents a major traffic driver for the company. And we want to get through the holiday season and evaluate several quarters of results here before we make another decision to change that mix.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. And then when your gross margin last year in the fourth quarter was hitting its low, I was hoping you can just rank for us the following factors in terms of biggest to smallest impact: markdowns, higher overseas costs, and higher cotton input costs.

R. Neal Black

In 2012, totally, approximately 3/4 of our gross profit margin dropped related to cost increases. Those cost issues are largely behind us since the commodity prices stabilized. And as we said, we expect our product costs to decline modestly through the end of 2013. So I guess, that kind of gives you the main issue that was hitting us. I think you can also assume from the results in shirts in the third quarter, as an example, that on the retail side, we actually felt we went too low in some categories. And we're happy that we are able to recover that in a positive manner.

Mark K. Montagna - Avondale Partners, LLC, Research Division

You said too low. Do you mean too low inventory or too low prices?

R. Neal Black

Prices, prices too low, which affects the margin.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Sure. And then if last year, 3/4 of the gross margin decline is cost increases, are you including both the higher raw material costs and the overseas costs or are you specifically just referring to raw material?

R. Neal Black

No, that's all -- that's the total.

David E. Ullman

Yes, that would be the total, Mark. All-in.

Mark K. Montagna - Avondale Partners, LLC, Research Division

So with that -- of that 3/4, was the bigger impact the raw materials or the sourcing?

R. Neal Black

Well, the raw materials in -- particularly in the cotton products, is the biggest component of the total cost of the product. And there's a particular dynamic there with the way that we source. Because we're aggressive in our sourcing process, we believe we achieve the lowest cost possible for the quality that we demand. And we understand the manufacturing process and we understand the profitability for the maker. Therefore, the maker does not have a cushion to hold cost for us when fabric prices go up due to increases in raw material over commodities as he might be able to do for less aggressive customers. So we attempt to push any cushions and excess profit for the maker out of our costs. We're always working as net-net-net as possible. So we tend to feel the impact more directly and instantly than a lot of people.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay, that's helpful. And then just last question. When you look out to next year, do you expect your ad dollar spend to be lower than this year?

R. Neal Black

I'm still working on that because we need to get through the fourth quarter to really evaluate the productivity. I think the fact that we could produce sales increases with a lower spend in Q3, with some different methodologies, and we'll be employing those same methodologies in Q4, so it's possible but it's too early to say.

Operator

Our next question comes from the line of Jill Nelson with Johnson Rice.

David M. Mann - Johnson Rice & Company, L.L.C., Research Division

It's David Mann. Unfortunately, I was delayed getting on as well by some problems, so I apologize if you dealt with this in your prepared comments. It was really good to see your store segment margin go up. I was curious on the Direct side, you're still seeing declines there. Can you just delve a little deeper into what some of the issues are and when you perhaps might see some of your strategies turning that segment margin more positive year-over-year?

R. Neal Black

I think, just as we mentioned about the Factory Stores margin, the Direct margin was affected by the penetration of additional clearance products moving through there from the last couple quarters of slower sales. And the penetration was higher than we normally run and higher than we plan to keep it for the future. So assuming we have sales to plan moving forward and we're not building clearance inventory as we did in the prior quarters, we should see that margin move back up.

David M. Mann - Johnson Rice & Company, L.L.C., Research Division

Okay, great. And then in terms of the inventory, I had to go back a long time to see inventory down this much year-over-year. So very impressed with what you've done there. I'm curious, can you give us some clarification whether that's all just the lower unit costs flowing through lower price, or are you actually starting to have lower units in inventory as well?

R. Neal Black

Our inventory, we think, is at an appropriate level and we're well positioned for the holiday season, which I think is everybody's concern about inventory. There were certain categories of merchandise we owned at this time last year that did not have a good sell-throughs in that critical fourth quarter of 2012. Therefore, we adjusted our purchases for 2013 to fit our sales plan. In addition, our cost per unit has also declined in certain categories, so this also results in a lower dollar inventory. We -- if sales continue to be very strong, we'll be even lower than we would like to be by the end of the year and we'll have to build that back up a little bit in '14. But we're trying to normalize the effects of the slower sales in prior quarters.

David M. Mann - Johnson Rice & Company, L.L.C., Research Division

Okay. And then in terms of what you were talking about for November, it sounds like you have been off to what you said a substantial start. Any reason to think that the margin levels would be deteriorating from the recent trend?

R. Neal Black

No, actually, as I said, I was encouraged that we had strong sales in November through Black Friday and into December through Cyber Monday without a deterioration of margin versus last year. And so we're feeling quite positive about that.

Operator

Now we go to the line of Brian Rafn with Morgan Dempsey.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Can you guys give any sense, now that you guys -- your factory outlets are at 43 stores, kind of what the difference in 4-wall profitability between the Full-line retail chain and the factory outlets?

David E. Ullman

Just directionally, Brian, at this time, the factory channel does have a positive operating profit, but it is lower than the Full-line stores channel. We're continuing to develop this concept, which we launched just in 2010. And as Neal referenced earlier, we have moved clearance product through that this year, so that does affect the gross profit margin.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Yes, so that's still evolving. How much as a percentage, Dave, is the clearance merchandise through that versus your old -- you got kind of 7 legacy factory outlets that you had really more of a clearance versus the new ones. What kind of mix do you have in clearance flowing through the 43 stores?

R. Neal Black

I'll let Dave come back to the numbers for a second, Brian. But I would say that when it was the 7 legacy stores, it was almost all clearance. We were making very little product only occasionally for that channel. I think we have a long-term goal of being at about 80% made-for product and about 20% clearance. It's running higher than that on the clearance side now.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Yes, yes, okay, I think that's fair. Let me -- you talked about your kind of consistent 40% kind of an EDLP, I don't know if that's what you call Make It WORK. Is that kind of a fixed target or do you see that incrementally expanding from that 40% base? I'm trying to get the nonpromotional side.

R. Neal Black

As I tried to describe in my text, the 40% is kind of where we see it for right now. We think the 60% promotional offerings, aggressive promotional offerings is still important for the traffic making part of our marketing campaign. And I need to get through another -- through this quarter to evaluate whether we should be expanding that. We had it about 25% earlier in the year and moved it up to 40%. And -- but right now, we're sticking at 40% through the end of the year and we'll evaluate it then.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Yes. How do you guys look at, when you look at traffic, when you look at dollars per transaction and IPTs in the direct channel, Internet versus your retail stores, how has that changed? Are you seeing more -- you guys talk about you're now in 90 countries, foreign, and how dynamic is that the growth in sales per transaction in maybe repeat customers in the Internet side versus your retail store?

R. Neal Black

Well, I can tell you that in the Direct side, the transaction is on average smaller, mainly because it has a little bit lower penetration to tailored clothing. Seems naturally intuitive when you think about it that it is a requirement for many customers to purchase tailored clothing in a hands-on experience, it requires fitting and tailoring and so forth. I'm always amazed on how much tailored clothing we do sell in the Direct channel. It's quite good. But it's not as penetrated as it is in the stores, so that makes the average transaction a little smaller in Direct. As far as the current business, as Dave said earlier, the traffic was down a little bit and our items per transaction were down a little bit in the quarter. But our average ticket was up. And that's what drove the sales. And so whenever that happens, you can always assume that we're selling tailored clothing and that's why it fits with the fact that suits were strong.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay. I'll just ask one more. The -- how do you guys have seen -- since you kind of been in this since 2007, 2008, tough retail environment. Kind of the elasticity of your customer, specifically the deals and how tough is it when that guy is coming in for a promotional sale, that 60%, how tough is it to accessorize that guy and get him to add on to that transaction or is he coming in as a sniper and just taking that one item and then leaving the store?

R. Neal Black

Well, I guess, you can say based on our results with a smaller items per transaction in Q3 that we didn't do it as -- we didn't achieve it as aggressively as we could have. But we were in the process of moving prices up in shirts, so that does affect it. I'm quite pleased with the overall mix right now. And clearly, when you look at whether it's our regular promotions or door busters over Thanksgiving, Black Friday, Cyber Monday, customers are seeking specific product and price. And we're performing well in those areas right now. So there is some of that sharpshooting going on. But we figure, if we get you in once on a door buster and you're happy with our products and our quality and the service that you get when you're in the store, that you'll be back and we're counting on kind of a lifetime approach to those customers.

Operator

The next question comes from the line of Mark Montagna with Avondale Partners.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Just a quick follow-up. The cotton raw material prices are lower, but what about wool, has that come down at all?

R. Neal Black

It's stabilized, Mark, but we haven't had any big declines there. It depends on the finished fabrics and the countries of origin. It's stable right now.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. And then -- so when we say stable, like -- it peaked maybe 1.5 years ago or so. Is it stable at that high level or has it subsided any at all?

R. Neal Black

I'm sorry, Mark, I was distracted for a second. Can you repeat that?

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay, that's fine. I think it peaked about 1.5 years ago, 24 months ago and I'm just wondering, is it still at that high peak level or had that at least come down a little bit and we're just leveled off at...

R. Neal Black

Wool has come down and leveled off. But as I mentioned, the cost components of -- it's never a straight line between what you see in the commodity markets in terms of the pricing versus the -- it's end effect on our products. In addition to other factors such as labor costs and taxes and currency valuations, the products that we sell tend to be in the finer qualities. So the commodity price you see in cotton is not the majority of the cotton we buy. We're buying long staple cotton which has its own market that's less visible and that's what goes into our woven shirts. In suits, in the wool side, we're in the super-fine wool arena, which is not the basic bulk of the commodity wool pricing. So there are other nuances in there that are -- it's kind of hard to peg the -- our ending cost price to the way you watch the commodities move.

Operator

And next, we go to the line of Brian Tunick with JPMorgan.

Brian J. Tunick - JP Morgan Chase & Co, Research Division

I guess, one sort of a -- just a bigger picture strategic question. Obviously, The Men's Wearhouse, a $2 billion acquisition for your first try. Understanding right leverage of men's retail. Just wondering if you can talk about what you think the company brings to the table in an acquisition of a company that might be outside of the men's tailored clothing space. I'd just be curious how you think about that if and when -- if this deal doesn't happen, what you think about you guys bring to the table from a leverage perspective? And then the second question, on the gross margin. I think you said you think you can get back to the pre-2012 levels. Raw materials sound like they're relatively going to be flattish from here. So what is the average suit price going out the door today or if you look at a basket of goods today versus a few years ago, how much have you seen a drop-off in average selling price?

R. Neal Black

Brian, I'll try to take the bigger picture question first. I did outline in my remarks the criteria that we have when we're looking at an acquisition, the generalized criteria: number one, the strategic fit with our business; number two, the ability to leverage our core competencies; and number three, the accretion and opportunities for synergies that would allow us to drive substantial value creation over the long term. I would say when you look outside the men's apparel business, and you look at what we've done in our term here at Joseph Bank, we have a core competency in real estate and store development, site selection, gross margin development, marketing, all of which can be applied to companies that are sourcing. All of which are -- can be applied to companies that are outside of the men's apparel space. And I'm only speaking of that as a statement of our historic core competencies. I'm not going to make any kind of a statement about what we may or may not be looking at other than Men's Wearhouse. Dave, you want to take a shot at the costing question?

David E. Ullman

Well, I think, generally, Brian, as far as the gross margin as we commented, or as Neal commented, the -- we certainly are pleased with the turnaround. We have a vision of going back to our previous levels. But we're not -- there's not a time line to which we can commit. That being said, as you referenced, the costs have declined somewhat, and certainly, we see stabilization on that side. And the other encouraging side is we are seeing that the retail side is -- we're able to go up on that, as Neal gave you a specific example on the dress shirts. So we think we're on the right path and it's just a matter of -- it is a matter of when. We do have that as our goal.

Brian J. Tunick - JP Morgan Chase & Co, Research Division

Right. But do you guys have like what a suit goes out the door at on average this year versus a few years ago, just to get an idea of what kind of -- the promotion has taken on the business?

R. Neal Black

I don't think I want to get into the specific impact of promotional pricing on the business. And it's really more complex than just looking at the averages. If you look at the shirts action that we had in the third quarter and our ability to move prices up and sales up at the same time, that's obviously a goal that we have all -- have had all the time for the many years. And it was the -- one of the earlier contributors to our gross margin growth early in our tenure here. And so sometimes, you achieve that through the mix of products rather than just moving the price up and down on one product. And so it's a much more complex, there is such a wide range of suits that it's hard for me to focus in on a simple statement about the average cost.

David E. Ullman

Okay, so we are at the time to -- we need to wrap up this call. We do appreciate the insightful questions and comments we received today. Thanks, everyone, for joining us this morning and we appreciate your interest in Joseph A. Bank as both an investor and as a customer. On behalf of everyone at our company, let me wish you a great holiday season. I will now turn the call over to the operator. Take care. Have a great day.

Operator

Ladies and gentlemen, this conference will be available for replay after 1 p.m. today through December 12, 2013. You may access the AT&T Teleconference replay system at anytime by dialing 1 (800) 475-6701 and entering the access code 308076. International participants dial (320) 365-3844. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.

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