It's not as if Men's Wearhouse (NYSE:TLRD) wasn't warned. The men's clothier was told that attempts to wean its Jos. A. Bank customers off the deep discounts they had become accustomed to were going to fail, but in its dogged determination to prove the critics wrong, it deeply damaged its own performance.
Men's Wearhouse completed its $1.8 billion purchase of rival Jos. A. Bank last year, but it became immediately apparent the vaunted synergies and savings management touted as justification for the deal would at best be delayed and at worst would never materialize. But when Men's Wearhouse decided the promotional environment offered by Jos. A. Bank would have to be eliminated to bolster profits, the value of the deal went completely off the rails.
Sales that had been trending down suddenly accelerated and have since collapsed. Comparable-store sales, an important retail metric because they strip out the effects opening new stores has on revenues, went from falling 1.5% in the first fiscal quarter to being down by more than 9% in the second. Last month Men's Wearhouse tried to prepare investors for an ugly third quarter by warning that comps were down some 14.6% from the year ago period, but things are only getting worse: By the time the retailer announced its earnings, Jos. A. Bank's fourth-quarter comps were plunging 35% through the first week of December.
It is a more dramatic rout than even troubled department-store chain J.C. Penney (NYSE:JCP) experienced at its nadir and fully amounted to as complete of a rejection of management's plan as could be signaled.
Yet it didn't have to be that way. Retail's landscape is littered with examples of companies that tried and failed to step on the brakes of being overly promotional. All Men's Wearhouse had to do was look.
By encouraging consumers to depend on those sales, and admittedly Jos. A. Bank's discounts went to an extreme -- the buy-one-get-three-for-free policy CEO Doug Ewert derides wasn't even the worst of it. You could buy one and get seven suits for free at one point -- it was never going to end pretty when it was stopped cold turkey. J.C. Penney's history to see its own future.
As is well known, former CEO Ron Johnson came to the department store with a vision of creating a modern retailer along the lines of what he helped fashion at Apple. Gone were stodgy in-house brands, cash registers, and doorbuster sales; in their place were put trendy national brands, employees with iPads to do checkouts, and a seemingly eminently reasonable everyday-low-pricing policy.
Johnson mocked so-called "fake sales" that had stores raising prices so they could dramatically lower them. Instead, he'd give customers a fair price all the time. What he neglected to consider was that J.C. Penney's main customer was as stodgy as the retailer itself and all the flash and dash was a jarring change. Worse, the chain's customers liked those sales because it made them think they were getting a great deal.
Other retailers, including Coach and tween clothing store Justice, have also discovered their customers want discounts, even if they're "gimmicky."
But even in the face of declining sales Men's Wearhouse had a stiff neck about the situation. Ewert maintained, "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."
Obviously that's not working out, and management now admits that if the complete abandonment of the chain continues at the same rate through the end of the quarter, it will miss even the low end of its earnings guidance.
But importantly, Men's Wearhouse realizes it needs to do things differently. While not completely throwing in the towel on pricing discipline, the retailer is reintroducing modest sales again, such as buy one, get two free.
That might not be enough to turn the tide for Jos. A. Bank, as it was only when J.C. Penney virtually wiped all traces of Johnson's doomed tenure from its operations, including going back to regularly scheduled doorbuster sales, did its fortunes change.
There might be no hope of salvaging the situation if Jos. A. Bank customers are only willing to shop there when they're getting rock-bottom discounts, but a more rational promotional policy may yet prove best in straddling both extremes.
Rich Duprey owns shares of J.C. Penney Company,. The Motley Fool owns shares of and recommends Apple and 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.