Wednesday morning, men’s suit retailer JoS A. Bank (click ticker for report: ) reported weaker than expected earnings for its third quarter. Sales increased 11% year-over-year to $233 million, roughly in-line with consensus expectations. Earnings per share fell 13% year-over-year to $0.47, which was worse than expected.
In a highly promotional low-end suit environment, the firm had to run several special sales to compete with the likes of Macy’s (click ticker for report: ), which was also quite promotional (and has the advantage of a stable of brand names). Same-store sales increased 4.8%, with online/direct marketing sales up 26% year-over-year, though the company acknowledged November sales trended downward (thanks in part to Sandy). Gross margins tumbled from 62.6% to 57%, or a 560 basis point decline. While the company had fairly strong gross margins to begin with, a 560 basis point decline is awful, in our view, and speaks to the various competitive pressures the firm faces from Macy’s and The Men’s Wearhouse (click ticker for report: ).
On the positive side, the company made few incremental SG&A investments, leading it to decline 320 basis points to 47.9% of sales. However, inventories look a bit hefty going into the holiday season, up 25% year-to-date versus sales growth of just 10%. We think the company will be highly promotional during the fourth quarter, which could lead to even weaker margins. Suits and more formal dress are becoming increasingly popular trends, but we fear the company may not have the right product to benefit as much as Macy’s or Nordstrom.
Though results were weaker than expected, we don’t anticipate a material change to our fair value estimate, and we continue to believe the company is fairly valued. Still, we aren’t optimistic about the firm’s prospects heading into the fourth quarter, so we think patient investors will be rewarded with a much more attractive entry point in the future.