The Men’s Wearhouse Inc. is keeping the promotional pedal to the metal for holiday, putting the bottom line at risk.
In posting a 35 percent increase in third-quarter earnings, the 1,274-unit, Houston-based retailer said it expects business to remain challenging in the fourth quarter and will answer that with continued aggressive promotions. It also said Tuesday it anticipates a fourth-quarter loss of 15 to 19 cents, versus analysts’ earlier expectations of a 1-cent profit, leading shares down sharply in after-hours trading.
On its analyst conference call after the market closed on Tuesday, chief executive officer George Zimmer said: “Until we have clear signs that the consumer is spending freely without promotion, we are guaranteeing that we’ll get our business by marketing heavily and promoting heavily.”
Over the past year, he said, the company has had success with its buy-one-get-one-free and buy-one-get-the-second-one-for-$100 promotions. In fact, he revealed, the latter actually outperformed the former, a phenomenon he attributed to the enthusiasm of the company’s employees for the second option.
While Zimmer said he is expecting 2010 to be “not quite as promotional” as this year, there are no plans to return to regular-price selling anytime soon. Cutting back on promotions could impact the company’s market share, its primary focus now and in the future.
“In the final analysis, it will be a multiyear process through continued market share gains, gross margin expansion and expense leverage to return to our historical double-digit operating margin profile,” Zimmer said. “Additionally, if comps become positive, the time frame for achieving double-digit EBIT [earnings before interest and taxes] will shorten.”
In the third quarter, the company overcame declines in gross margin and clothing sales to post a nearly 35 percent increase in third-quarter earnings, eclipsing its own estimates and those of Wall Street.
In the period ended Oct. 31, the company generated net income of $19.7 million, or 37 cents a diluted share, higher than the analysts’ consensus estimate of 33 cents and its own guidance for earnings per share of 27 to 30 cents. In the year-ago quarter, profits hit $14.6 million, or 28 cents, including a 2-cent charge to cover the cost of closing a Canadian production facility.
Sales rose 0.5 percent to $462 million from $459.7 million. Increases in tuxedo rentals and alterations more than compensated for a 0.1 percent decline, to $333.9 million, in its largest business, clothing product. Same-store sales were down 0.2 percent at Men’s Wearhouse stores and 1.1 percent at K&G stores, but up 1.9 percent at the Moores unit in Canada, calculated in local currency.
Gross margin fell back to 43.9 percent of sales from 44.1 percent a year ago.
In the fourth quarter, sales are expected to decline in the low-single-digit range overall and at the MW division. The sales guidance and projection of a loss sent shares down 16.4 percent, to $18.35, in after-hours trading.
Turning to e-commerce, Zimmer said site traffic and business is “surging after a software stumble earlier this year.” He took responsibility for the company’s late entry into the Internet marketing and social networking business but in 2010, he said, the Web site should “do more volume than any [single] Men’s Wearhouse store, close to $10 million.”
For the nine months, net income grew 12.3 percent to $64.4 million, or $1.22 a diluted share, while total revenues tracked downward 2.9 percent to $1.45 billion.
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