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Jos. A. Bank Sees Rare Miss in First Quarter

Stock declines 13 percent after retailer falls short of analysts' expectations.

Jos. A. Bank
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Special Issue
Men'sWeek issue 06/02/2011

Wednesday was neither a good day nor a typical one for Jos. A. Bank Clothiers Inc.

This story first appeared in the June 2, 2011 issue of WWD.  Subscribe Today.

Shares of the specialty store firm — a nearly perennial source of improved sales and earnings — dropped more than 13 percent after the Hampstead, Md.-based retailer reported first-quarter profits and sales fell short of analysts’ expectations, although not of year-ago results. Sportswear sales declined and, perhaps most uncharacteristic of all, comparable-store sales eked out a 0.1 percent gain versus a more customary 10.4 percent gain a year ago.

For the three months ended April 30, net income rose 12.7 percent to $17.8 million, or 64 cents a diluted share, 1 cent below the consensus earnings-per-share estimate of 65 cents carried by Yahoo Finance. In the year-ago quarter, profits were $15.8 million, or 57 cents.

Sales picked up 8.5 percent to $193.3 million, from $178.1 million a year ago, below the $195.4 million anticipated by analysts.

Shares ended the day Wednesday at $49.51, down $7.59, or 13.3 percent, the worst one-day performance on a percentage basis since 1998.

R. Neal Black, president and chief executive officer, was frustrated by the reaction of Wall Street. “It’s never good to announce earnings on a day the entire market is getting pounded,” he said. “Everybody is focusing on the negatives but there were positives too.”

The Dow Jones Industrial Average Wednesday dropped 279.65 points, or 2.2 percent, to 12,290. It was the index’s biggest drop since June 2010 and the largest percentage decline since August.

Admitting that certain components of the results needed further clarification, Black said the company had been posting healthy comp gains through March and was expecting another increase for April, spurred on by the Easter holiday. “But we didn’t get an Easter lift and everyone else did,” he said. Sportswear in particular was hard-hit.

The only logical explanation, he said, was that the weather was cold around Easter, impacting sales of casual spring merchandise. “But the minute the weather got warm, sportswear took off,” he said, noting that May comps were up.

Black said sales of suits and dress shirts continued to perform throughout the quarter.

Also throwing a pallor over the results was the fact that the company was up against a year-ago comp increase of 10.4 percent.

“But we posted record earnings,” Black said, and have been up for 20 consecutive quarters. “That’s fantastic news, but we got it through margin this time, not sales, and somebody didn’t like that,” he said of the analyst reaction. Gross margin increased to 64.8 percent of sales from 63.6 percent a year ago.

In a research note, Margaret Whitfield of Sterne Agee, said she was lowering estimates as a result of the earnings report “which fell 4 cents below our estimate.” She also lowered her fiscal-year EPS estimate to $4.13 from $4.16, but left untouched her estimate for the second quarter, when comps are expected to be up 7 percent, including tux rental, with flat gross margins, versus earlier expectations of an 11.5 percent comp increase with gross margins down 50 basis points.

Black responded by saying that recent estimates were 64 cents but had been raised by analysts 2 cents after the retail sector showed strength. “We earned 57 cents a year ago and 64 cents this year against expectations of 66 cents. We don’t give guidance, so we just have to live with what they say,” he said.

Mark Montagna, senior research analyst with Avondale Partners, who was expecting a 5 percent comp gain in the period, wrote that he is “concerned that the customer is not accepting Jos. A. Bank’s price increases. The 0.1 percent comp gain was driven by a traffic increase, but offset by lower dollars per transaction and lower items per transaction. This implies the customer is not accepting the higher prices.”

Black noted that the company had increased prices on dress shirts by around $5 in the first quarter, and since business was so strong going into April, he made the decision “to keep our prices up and test the waters. We know that everybody is going to have to take price increases eventually. We’re just a little ahead of the curve.”

Dress shirt sales were up in the quarter, he said, and the company is “happy with the results. And we may not have to go up again. With sportswear though, it’s the other way around.

“So the customer is accepting price increases on some things. We’ve just got to have more time on sportswear to understand the variables. The weather didn’t seem to hurt anybody else.”

Inventory levels were also up 12.2 percent in the quarter, an increase that was intentional, according to Black. “We ended last year too low on inventory and missed some business in some categories in the fourth quarter,” he said. To remedy that situation — and guard against the looming price increases — Jos. A. Bank has been beefing up its stock.

“We’re loading up on basics,” he said. “We will do that all year. It’s less expensive than if we wait until later in the year.”

In addition, “we like carrying a lot of inventory,” he added. “We offer a wide array of sizes — we have 47 sizes of shirts and three rises in dress pants and we carry sizes 36 to 60 in tailored jackets. A lot of our inventory is basic and classic, so there’s not a lot of risk.”

Regarding the company’s newly launched tuxedo rental program, Montagna said, “Investors have been looking to robust growth…[but] the comp would imply this is not occurring.”

Black said that the company did not break out sales for this category of business and won’t make a determination on the success of the initiative until after the prom and wedding season. “We are getting sales,” he said, noting that the company doesn’t own the inventory and has invested little to get into the business. “There’s only upside.”

Looking ahead, Black said the company’s rare miss in the first quarter was just a blip. “Since sales were up in May, it indicates there is nothing permanent going on,” he said. “We’re in a promotional business — you win some, you lose some. It’s just a shame to lose some at the end of the reporting season when you don’t have time to make it up.”

Although Black has heard rumblings in the market that business may start to slow in the second half, he’s not all that concerned. “The wild card for us is inflation,” he said, “and what that really means. But we’re pretty confident we will find a pathway for us.”