The Men’s Wearhouse is turning up the heat on promotions.
The retailer revealed Wednesday that it is ditching its branding advertising campaign in favor of “time-sensitive price promotions.” Aggressive Labor Day buy-one-get-one-free ads resulted in “the single largest volume day in the history of the company,” Doug Ewert, president, told analysts on the company’s second-quarter earnings call. “Our strategy for the balance of the second half of the year is to focus our TV spend on compelling offers that drive traffic and volume at acceptable margins.”
George Zimmer, chief executive officer, explained: “Our increased spending in marketing has been less than satisfactory when compared to our initial objectives. If you recall we embarked on a focused, brand-oriented campaign at the beginning of the second quarter. While I received positive feedback on that campaign, I believe that on balance our message must be stronger in the mind of the customer and potential customer than what the initial creative provided. So our strategies have been modified beginning with this past Labor Day weekend to drive a stronger promotional message in order to capture a greater share of mind. We’re encouraged by the initial response of our Labor Day campaign.”
He said that in order “to respond to the challenges of the recession, the new normal, we have successfully transitioned ourselves from an everyday low-price brand to a promotional brand while increasing our profitability.”
On Wednesday, the company reported a better-than-expected improvement in second-quarter earnings on a 2 percent sales gain.
Net income for the three months ended July 31 was $42.5 million, or 80 cents a diluted share, 7.7 percent above the $39.5 million, or 75 cents, reported in the comparable 2009 period. Excluding acquisition-related costs tied to the purchase of Dimensions Clothing Ltd. and Alexandra plc, two European workwear companies, EPS came to 83 cents, versus the 77 cents expected, on average, by analysts polled by Yahoo Finance.
Led by a 10 percent increase in tuxedo rentals, overall sales rose 2.1 percent to $537 million from $526.2 million in the prior-year period. The increase in tuxedo rentals, to $142.5 million, was somewhat offset by a 0.6 percent decline in clothing product sales, to $362.2 million. Comparable-store sales rose 2.7 percent at Men’s Wearhouse, fell 4.6 percent at K&G and, in Canadian dollars, rose 0.6 percent at Moores.
Gross margin before occupancy costs increased to 61.3 percent of sales from 59.1 percent a year ago. Gross margin by business segment rose to 55.5 percent from 53.3 percent in clothing, jumped to 84.5 percent from 83.4 percent in tuxedos and declined to 24.3 percent from 26.7 percent in alterations and other services.
The company noted that due to “greater efficiencies within our logistics network” for the tuxedo rental operation, it will close four of its 11 distribution centers. That is expected to result in a charge of approximately $2.2 million in the third quarter and $600,000 in the fourth quarter.
The third quarter is also expected to be affected by the recently acquired workwear companies, which are expected to be neutral to 1 cent accretive in that period, but “more heavily weighted toward the fourth quarter.”
For the third quarter, the company forecast adjusted EPS of 40 cents to 47 cents a diluted share, with the lower figure matching the current consensus estimate. Comps are expected to be flat at Moores but up in the low- to midsingle digits at Men’s Wearhouse and down in the midsingle digits at K&G.
The K&G division continues to struggle, and several stores will be closed later this year. “At K&G, our core customers have been African-American men who suffer unemployment rates in the range of 25 percent, well in excess of national averages,”Ewert said. “We’ve been testing a number of product initiatives designed to build a broader platform for future growth. While some of these initiatives have shown promising results, others have not performed to our expectation. In studying this business and factoring in all that we know and anticipate, we believe the best strategy is to focus on returning to acceptable operating margins. Specifically, we will be closing nonprofitable stores, a total of six this year, and focusing on our core customer with targeted price promotions.”
Turning to the overall issue of price increases on wholesale goods, Ewert said the company “has seen a modest increase in forward prices due to rising raw material and Chinese labor costs. But there are many ways to deflect it, including switching factories, mills or suppliers.”
At the flagship Men’s Wearhouse division, approximately 40 percent of the suit offerings are private label and 60 percent branded. “Shifting more emphasis to private label can also provide us with more flexibility,” Ewert said. However, he said that any changes would be modest.
For the first six months of the year, net income jumped 25.5 percent to $56.1 million, or $1.05 a diluted share, from $44.7 million, or 85 cents, in the first half of 2009. Sales were up 2 percent to $1.01 billion from $990.3 million.
Earnings were reported following the close of the markets on Wednesday. The company’s shares ended the session at $21, up 11 cents, or 0.5 percent, and moved higher in after-hours trading.
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