Men's Wearhouse (TLRD) stock opened lower last Thursday after reporting second-quarter results the evening before. Despite beating analysts' earnings estimates, the company's revenue fell short of expectations. Let's take a look at the men's clothing retailer's latest conference call and dig into some of the things management wants investors to know about the company's performance.
Comps were a mixed bag
In 2013, Men's Wearhouse grew same-store sales by just 0.7%, and Jos. A. Bank's same-store sales declined 3.7%. Comps turned up for Men's Wearhouse in the second quarter, growing 4.4%. Jos. A. Bank's comps also grew, but at a more tepid 1% growth rate. Management warned that the new acquisition's comps are set for a decline in the back-half of the year:
In the first half of 2014, Joseph A. Bank had positive comp growth, but they were up against negative comps to 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.
Now starting in late July and for the balance of 2014, the Jos. Bank business is up against positive comp sales in the prior year. ... [We] think that comp sales growth at Joseph A. Bank is likely to be negative for the balance of the year. In fact, we now have August behind us and the Joseph A. Bank comp sales growth was negative by 1.3%.
-- CFO Jon Kimmins
Gross margin: Don't sweat the big drop-off
The companywide gross margin percentage declined 3.06 percentage points compared to Q2 2013. As alarming as this sounds, it's nothing to worry about. The drop is largely due to the consolidation of Jos. A. Bank, which sported a 56% retail clothing margin in 2013 compared to Men's Wearhouse's 60% retail clothing margin. About two-thirds of the drop-off can be attributed to Jos. A. Bank's lower margin, which declined two to three percentage points compared to Q1 2013. Management put a positive spin on the results:
Margin rates for the legacy Men's Wearhouse businesses were all approximately flat to last year. So, we were able to drive strong comp growth without sacrificing margin rate and we're pleased with this result. The overall adjusted gross margin rate dropped significantly for the quarter but all of this was due to the Jos. A. Bank partial period results.
-- Kimmins
Spreading the word
Management warned investors in July that second-quarter earnings would be negatively affected by higher spending on advertising. The company anticipates devoting 5.5% to 6% of sales to advertising through 2017, up from Men's Wearhouse's 4.1% advertising spending in 2013. The company came in below the anticipated range in the most recent quarter, but investors should expect advertising to become a larger percentage of sales in future quarters because of the impact of Jos. A. Bank's higher cost structure:
For the quarter, total advertising expense was just under 5% of sales. This was approximately 1% higher than the same period last year. More than half of this increase was driven by the inclusion of Jos. A. Bank which continues to run at a rate of 7% to 8% of sales.
The rest of the increase was driven by higher ad spend at Men's Wearhouse and Moores as we roll out the Joseph Abboud brand in both chains.
-- Kimmins
Merger synergies on the horizon
Management expects a minimum of $5.50 earnings per share in 2017 if the company realizes $100 million in synergies by that date. However, it will take several months before synergies start to flow through the income statement. Nonetheless, sales, general, & administrative expenses have already declined as a percentage of sales -- excluding advertising expense. Moreover, management says, "very little of [the savings] came from synergies." This means the company could exceed expectations for a lower cost structure.
The Jos. A. Bank business has always hit relatively low SG&A. And as stated in the Men's Wearhouse Q1 conference call, we have been focused on lowering SG&A in the legacy businesses. In last night's press release, we stated that on an adjusted basis, we had 160 basis points of expense leverage compared to last year.
When we look at this without the effect of the Jos. Bank business and excluding advertising, the Men's Wearhouse Legacy businesses achieved almost 200 basis points of expense leverage. I should point out for the second quarter very little of this came from synergies. So again, we are pleased with our progress in expense management.
-- Kimmins
Near-term picture is unclear
Although management seems adamant that Men's Wearhouse will achieve cost savings and earnings growth over the next three years, nobody is certain how things will play out in the coming quarters. Instead of giving specific yearly guidance, management directed investors and analysts to keep an eye on long-term targets. This makes it difficult for investors to measure the company's short-term performance against its long-term goals, but it may be fair in light of the recent acquisition.
Now as we look forward, we remain focused on achieving our three-year goals as laid out in July in our Analyst Day Presentation. While we are not providing specific near-term EPS guidance, we hope to provide color around our progress toward our long-term goals. It's been only three months since we closed the acquisition and only six weeks since our Analyst Day presentation.
-- Kimmins
Takeaway
Men's Wearhouse is a behemoth in a mature, fragmented market. The company is not performing at the top of its game, but management paints a rosy long-term picture for stockholders. It is not yet clear what the outcome will ultimately be, but management is clearly optimistic. Investors should monitor Men's Wearhouse's same-store sales growth, gross margin, and SG&A expense to ensure the company's performance matches management's promises.
