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Markdowns and a last-minute promotion upended by Hurricane Sandy hit Jos. A. Bank Clothiers Inc.’s bottom line hard in the third quarter, delivering an earnings decline despite a double-digit increase in sales.
“We had a decline in our operating income margin due to additional markdowns and promotional activity which were needed to drive these sales,” said R. Neal Black, president and chief executive officer of the Hampstead, Md.-based men’s specialty store chain. “Also, Hurricane Sandy, which hit along the East Coast where the majority of our largest volume regions are located, negatively impacted third-quarter sales, particularly when we ran a big promotion right at the end of the quarter.”
Black told WWD that the store had been “running aggressive promotions” in the quarter “as we have been all year. These promotions are at a lower gross margin rate than last year due to higher-cost inventory that was placed and manufactured when cotton and wool were at all-time-high prices. So we needed to do extra sales to make up the difference. Sales were fine, but not enough to make up for the higher costs — thus lower profits. This will normalize over time so our strategy is still to offer high-quality classic men’s wear at compelling prices.”
Jos. A. Bank has become renowned for its buy-one-get-several-free promotions as well as other attention-grabbing price cuts. For example, its Web site on Wednesday was offering up to 65 percent off on all suits and sport coats with free shipping. Outerwear was being promoted at 60 percent off and the company was offering a free Android smartphone with any purchase while supplies lasted.
The quarter ended on Oct. 29, the day of Sandy’s arrival. The so-called superstorm seriously impeded shopping in the Northeast and Middle Atlantic during the weekend prior to its arrival, disrupting JAB’s promotional aspirations. Sandy’s impact, coupled with the national focus on the election, contributed to declines in comparable-store sales during the first two weeks of November as well, Black said.
In the third quarter, net income dropped 11.2 percent to $13.3 million, or 47 cents a diluted share, from $15 million, or 54 cents, in the 2011 period. Analysts had expected earnings per share of 56 cents for the more recent period.
Sales were up nearly as much as profits were down, beating analysts’ consensus estimates of $231.8 million with an 11.1 percent increase to $232.9 million from $209.6 million in the prior-year quarter. Comps were up 4.8 percent and direct marketing revenue ahead 25.8 percent.
The impact of markdown pressure was obvious from the firm’s 27.8 percent increase in cost of goods sold — to $100.2 million from $78.4 million. That sent gross margin down 560 basis points, to 57 percent of sales from 62.6 percent in the comparable period last year.
Without providing fourth-quarter guidance, Black said the company expects “continued pressure on margins” in the fourth quarter. He said he remains “cautious,” which is “nothing new. The hurricane had a major impact on sales as we had 114 stores in our biggest regions closed from one to eight days — primarily from power outages — and customer traffic was affected for over a week. Plus, for our customers nationwide, the national election is always a big distraction.”
To boost sales in the quarter, Jos. A. Bank joined other large retailers by opening on Thanksgiving Day. “We opened on Thanksgiving at 10 p.m. because Thursday night is the new time when customers are out seeking Black Friday specials, and it’s driven by the big stores. We’re glad we were open,” he said.
Black said that, right now, “customers are responding to suits and dress shirts. Casual sportswear was OK, but not what it is in a year when it’s really cold early or in a year when the Christmas shopping season is shorter. I expect casual will pick up as customers get fully into the gift buying mode.”
Richard Jaffe, analyst at Stifel Nicolaus, said in a research note he anticipates “heightened marketing and promotional efforts will help management drive moderate sales gains and comps in 4Q at the expense of gross margin, particularly in light of the high level of inventory.” On a per-square-foot basis, he estimated inventories were up 7 percent. At the end of the quarter, total inventories stood at $379.6 million, 24.6 percent above their level at the start of the fiscal year.
Jaffe pointed out that better traffic at the company’s stores was offset by lower dollars per transaction. Suits, he said, generated “moderate” unit sales growth while “other tailored clothing,” dress shirts and sportswear were stronger.
Wall Street exacted a toll on the stock for the earnings miss, a rarity in Jos. A. Bank’s 18-year history as a public company, sending shares down $3.43, or 7.3 percent, to $43.85. The company also reported a miss in the first quarter of this year but rebounded in the second.
For the nine months, net income fell 3.8 percent, to $51.3 million or $1.83 a diluted share, as sales were up 9.6 percent to $694.5 million.
The company, which operates 599 stores in the U.S., has scheduled a conference call for 11 a.m. today to discuss the results.