2009 Profits at Men's Wearhouse Not Guaranteed
Neill Davis, chief financial officer of The Men's Wearhouse, told analysts on the fourth-quarter 2008 earnings call that "promotional posture is resonating with customers-both new and existing -- and is positively impacting gross profit dollars, due in large part to effective marketing and merchandising initiatives." Despite management's attempt to put a positive spin on "buy one - get one free" promotions and other markdown sales, Davis' corporate speak cannot sugar-coat the hit to profitability caused by the apparel retailer's discounting practices.
Total store sales for the year-ended January 31 slumped 6.6 percent to $1.97 billion, due to declining store traffic and deteriorating average net sales per square foot (8.2 percent at Men's Wearhouse locations and 16.4% at K&G locations) caused by the recession.
Gross margin declined 280 basis points to 43.1 percent, resulting from increased occupancy costs [from higher rental rates for new and renewed leases] and the failure -- Neill's remarks not withstanding-of merchandising discounts to influence buying patterns of apparel shoppers.
Expectations are that difficult economic conditions will continue into 2010. As the company cannot predict when the economy will recover, senior management plans to stimulate sales with even deeper clothing discounts and to implement additional operation cost controls, such as reductions in inventory purchases and fewer store openings.
Due primarily to the lack of forward visibility as to macro economic conditions, management will only provide financial guidance for the first half: earnings per share in a range of $0.45 to $0.65; comparable store sales of its retail apparel business are anticipated to decline in a range of six percent to 10 percent and comparable store sales of its tuxedo rental revenues are expected to increase between seven percent and nine percent.
Several retail analysts have upgraded their ratings, too, opining that Men's Wearhouse could deliver better-than expected 2009 operating results, driven by significant cost-savings and higher tuxedo rental bookings and clothing sales (from additional discounting). This optimism could prove to be premature, as a growing dependence on deep discounts could serve only to further pressure merchandising margins. In addition, although tuxedo rentals remain an area of growth, even a nine percent sales gain will do little to offset falling sales (as tuxedo rental sales represented only 7.5 percent of total apparel sales in the fourth quarter of 2008).
"Because an appeal makes logical sense is no guarantee that it will work." ~ NYC advertising genius William Bernbach (1911 - 1982)Chief executive and founder George Zimmer also serves as the face of the company in television commercials, simply extolling: "you're gonna like the way you look! I guarantee it." Unfortunately, the apparel retailer's discounting practices might not be a comfortable fit with actual earnings results in coming quarters.