Men's Wearhouse (NYSE:TLRD) gave investors a glimpse of its third quarter earnings report last week, and it wasn't pretty. While comparable-store sales at its namesake stores and its K&G discount brand were all higher, those at the Jos. A. Bank chain it acquired last year plunged almost 15%. And Men's Wearhouse said it's only going to get worse. In response, the market cut its stock nearly in half.
Giving away the store
The problem for Men's Wearhouse is that it's trying to put an end to Jos. A. Bank's always-on sales policy. This quarter, it cut back on the number of promotional events typically held throughout the quarter in favor of a single, bigger buy-one-get-three-free sale at the end of the period. That apparently didn't go over so well with Jos. A. Bank customers who are accustomed to the regular sales promotions.
Men's Wearhouse expected softness in revenue as a result of the policy change, but what it didn't anticipate was the complete collapse in store traffic, because the comparisons from the year-ago period, when comps declined 8%, were supposed to get progressively easier as the quarter advanced. Instead, the losses became more dramatic.
But the men's clothier remains undaunted and CEO Doug Ewert says, "We continue to believe that transitioning away from the unsustainable promotional strategy we inherited from Jos. A. Bank and accelerating our new promotional strategy is the right thing to do for the long-term success of the Jos. A. Bank business."
Coming apart at the seams
Good luck with that. As anyone in retail knows, J.C. Penney (NYSE:JCP) also tried to wean its customers off the expectation of regular doorbuster sales in favor of everyday low pricing, but a retailer that was facing falling sales was suddenly exposed to an accelerated decline as customers fled to the point where it almost went bankrupt.
It was only after the department store chain reversed nearly all the policies former CEO Ron Johnson implemented that it was able to stem the losses. Men's Wearhouse could face a very similar situation.
Don't think so? Retail is littered with examples of stores that thought they could change consumer shopping preferences. Coach wanted to improve its image of prestige and eliminated the number of online sales it offered, causing direct sales to tumble 11% in its fiscal 2016 first quarter. As bad as that looks, it's actually an improvement over the 20% plunge they took for all of 2015.
Similarly, Ascena Retail Group -- the owner of Ann Taylor, Dress Barn, and tweens clothing store Justice -- has witnessed a collapse in the latter's sales as it tries to move away from "gimmicky" promotions toward a more full-price policy. In its most recently reported quarter, the tweens division recorded an 8% decline in sales while turning a $99 million profit in 2014 into a $63 million loss.
And just as Men's Wearhouse says it remains steadfast in staying the course, Justice President and CEO Brian Lynch chafes at the idea that it's pulling a J.C. Penney, saying the two situations are completely different. One was a top-down decision, he says, while the other is being driven by customer feedback.
Men's Wearhouse maintains that it, too, can change customer expectations. In a recent interview with Bloomberg, Ewert said, "Jos. A. Bank is a brand that just needs some updating, and we're updating that brand as aggressively as we can. There's a lot to talk about besides just price."
Maybe, but price is apparently all its customers want to discuss. Like J.C. Penney, Jos. A. Bank's decline in same-store sales is accelerating. They were down just 1.5% in the fiscal first quarter, 9.4% in the second, and now 14.6% in the third. Management anticipates they'll fall as much as 25% in the fourth.
While the marriage of the two men's clothing brands made a lot of sense on some levels, there were also plenty of warning signs the integration wouldn't be smooth and was more a maneuver that benefited Men's Wearhouse's hedge fund owners rather than the individual investor. It also appears to vindicate Men's Wearhouse founder and former CEO George Zimmer, who had expressed concern the retailer would become too aggressive in making cuts in an effort to make the integration work and would ultimately undermine its ability to grow sales.
Men's Wearhouse has now lost two-thirds of its value after hitting an all-time high of $66 a share this past summer. It's likely that -- if it continues on this path -- it will find, just as J.C. Penney did, that it's easier to admit defeat and reverse course than doggedly press on.
Rich Duprey owns shares of J.C. Penney Company,. The Motley Fool owns shares of and recommends Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.