The Men's Wearhouse, Inc. Earnings: Jos. A. Bank Disappoints

After hitting all-time highs earlier this year, Men's Wearhouse's (TLRD) stock price fell over 3% in after-hours trading Wednesday after the apparel retailer reported worse-than-expected third-quarter fiscal 2014 results. Shares were down about 0.8% as of Thursday at 2:15 p.m. In particular, comparable-store sales plunged by 8.1% at freshly acquired Jos. A. Bank. Let's take a closer look at Men's Wearhouse's third-quarter earnings report.

Just the numbers
Men's Wearhouse came in below analyst expectations on two key metrics.

Men's Wearhouse generated $0.86 in earnings per share in the third quarter of 2013, and analysts expected a slight increase this year. However, the company hit an earnings setback as a deep sales decline and lower gross margin caused Jos. A. Bank to perform worse than management expected.

"During the quarter, Jos. A. Bank's comparable sales were slightly below our internal expectations but, as part of our operating strategy for the brand, we are very encouraged by the positive increase of 123 basis points in the maintained product margin rate," CEO Doug Ewert was quoted as saying in the company press release.

Compounding the problem, operating expenses increased as revenue declined, shrinking the company's overall operating margin to 5.07% -- down from 9.25% in the year-ago quarter. Contributing to the decline, gross margin fell 3.78 percentage points to 41.45%.

Profitability should improve as Jos. A. Bank is integrated into its new owner, but comparable-store sales show a troubling trend. Although comps grew 2.2% at Men's Wearhouse locations, the 8.1% slide at Jos. A. Bank was steeper than management expected. Jos. A. Bank comps are down 0.2% through the first three quarters of 2014, compared to a 6.4% decline through the same period in 2013. One poor quarter does not make a trend, but investors should keep an eye on Jos. A. Bank comps to ensure the decline doesn't turn into a long-term slide.

Telling it like it is
The earnings release included important guidance from company executives. Management recommitted to earlier guidance for $100 million to $150 million in run-rate cost synergies with Jos. A. Bank by the end of 2017. The company is ahead of schedule on cost-cutting, having already disposed of the $15 million in expenses that it had planned to eliminate by the close of fiscal 2014.

However, investors should not focus solely on synergies. Aggressive cost-cutting could lead to disgruntled workers and poor customer service, which could affect the top line. Investors should concentrate on Jos. A. Bank's earnings over the next several quarters to ensure that cost reductions do not lead to such large declines in revenue that value is destroyed.

The other big update involved K&G, a men's and women's discount apparel chain that represented nearly 11% of Men's Wearhouse's overall sales through the first three quarters of fiscal 2014. Management had shopped the chain to a number of buyers, but did not receive any offers that it deemed acceptable. As a result, the company intends to continue operating the chain as a wholly owned subsidiary.

Tough quarter for retailers
Men's Wearhouse isn't the only retailer to report disappointing third-quarter results. Last month, Kohl's reported weaker sales and lower margins, putting an end to the momentum it had built up in the second quarter. J.C. Penney came up short after three consecutive quarters of rising sales.

Investors can hardly blame Men's Wearhouse for what seems to be a weakening retail sector. However, continued deterioration in Jos. A. Bank's comparable sales could spell trouble in the years ahead. Keep an eye on its integration into its new owner to see if any trends develop -- this could keep you one step ahead of the market.