The Men’s Wearhouse Inc. is trying to break Jos. A. Bank’s “buy one, get four free” addiction. And it’s going to hurt.
In a conference call discussing second-quarter results on Thursday morning, Jon Kimmins, chief financial officer, said, “We expect sales in our Jos. A. Bank business to be somewhat lumpy due to their very aggressive promotions over the past couple of years.”
He said that while comps at the division were “fairly strong” in May and June, they dropped 6 percent in July, with gross margins “significantly below” those of Men’s Wearhouse in the second quarter, leading to an “overall drag on the company’s adjusted gross margin” of 222 basis points. Without the Bank numbers, gross margin rose 10 basis points. Comps in August were down 1.3 percent, he said. Including the 45 days in the quarter prior to the acquisition, Bank’s comps rose 1 percent.
The acquisition of Bank after a long, vituperative battle was completed on June 18 at a cost to Men’s Wearhouse of $1.8 billion. So, making Bank more profitable is key.
Kimmins said that, in the first half of 2014, Bank “had positive comp growth, but they were up against negative comps the prior year. Despite being up against these easy comps, they still had to be more promotional than the prior year to achieve the positive comp growth.” Starting in late July and for the balance of 2014, he added, Bank is “up against positive comp sales.” As a result, as Men’s Wearhouse begins to “test ways to improve Bank’s promotional and advertising strategies and to stabilize gross margins…we think the comp sales growth at Jos. A. Bank is likely to be negative for the balance of the year.”
Doug Ewert, president and chief executive officer of the company, said, “The biggest challenge we face at Jos. Bank is reversing the margin corrosive strategy to drive top-line results by progressively lowering prices and increasing promotional marketing spend over multiple years. I believe this strategy is unsustainable, produces diminishing returns and erodes brand equity. During July and August, we did not lower prices at Jos. Bank below the previous year and saw some top-line erosion, illustrating the challenges we will face moving forward.”
Ewert said, “The slow turns and long inventory lead times inherent in this business will prevent positive change as quickly as we want.”
Instead, he pointed to some high points in the other parts of the Men’s Wearhouse business, including “excellent results in tuxedo rental, with a U.S. comparable sales increase of 9.1 percent, and from our Joseph Abboud rollout, which will be complete in the coming weeks.”
Late Wednesday, Men’s Wearhouse reported that, in the second quarter, Men’s Wearhouse stores comped up 4.4 percent, K&G was up 5.6 percent, and the Canadian operation Moores, calculated on the basis of local currency, leaped 10.2 percent.
Overall, Men’s Wearhouse sales were up 4.5 percent, to $450.3 million; K&G’s were up 1.6 percent, to $86.2 million; and Moores’ were up 4.7, to $78.1 million. Bank contributed $113.7 million to revenues during its 45 days on Men’s Wearhouse’s books.
During the quarter, net income contracted 71.5 percent, to $12.3 million, or 25 cents a diluted share, from $42.9 million, or 85 cents, in the year-ago quarter.
But removing costs related to the acquisition and integration of Bank and other onetime items, adjusted EPS was $1.10, 4 cents above the consensus estimate of analysts.
Revenues totaled $803.1 million, up 24.1 percent from the $647.3 million tallied in the 2013 quarter. Subtracting Bank’s contribution in the most recent period, revenues rose 6.5 percent, to $689.4 million.
During the first half of the year, net income declined 62.2 percent, to $28.7 million, or 60 cents a diluted share, while sales rose 13.4 percent, to $1.43 billion. Eliminating sales attributable to Bank, revenues rose 4.4 percent, to $1.32 billion.