Wolf Richter www.testosteronepit.com [11] www.amazon.com/author/wolfrichter [12]
When Men’s Warehouse reported quarterly results [13] and cut its guidance, it joined the crowd of revenue-challenged clothing retailers. Revenue fell 2.3% year over year. All categories were down: retail clothing, tux rentals, alterations, and corporate apparel. Net profit plunged a cool 27.7%. But as was the case with its peers that had already reported, it’s not so much that sales were crummy – and gosh, they were – but that the excuses management came up with to keep their stocks from crashing were even crummier.
“A difficult second half”
CFO Jon Kimmins, right out the gate during the earnings call [14], pointed his finger at the tux rental business, which was down 4.2%, for a $0.10 hit to EPS. They had to shutter over 50 tux stores. He blamed a “significant shift in the prom-related rentals that were pulled into the first quarter and out of the second quarter.” The kids ate his homework! In the same breath, he tried to manipulate up his stock; share repurchases would “continue to grow as the year proceeds,” he said.
A recovery in the second half? Not exactly. “Recent sales trends in both Canada and the US have led us to be less optimistic about the remainder of the year,” he said. “We see that many other retailers, both large and small, are also predicting a difficult second half.”
Then CEO Douglas Ewert let his creative juices flow. He blamed “shifting priorities in consumer spending” for the debacle of the industry, along with “uncertainty among our core customers’ confidence in the economic climate.” He elaborated his strategy of getting “through these headwinds” by “protecting our margins.” Hence, no reckless discounting, not at this point.
He blamed Canada. The company’s 120 Moores stores there, accounting for 12% of total revenues, were “entering the fourth straight quarter of negative results.” He lamented traffic levels that are “pressured by macroeconomic conditions.” They’d seen “some improvement” in Québec, but “the English-speaking provinces continue to be challenged.”
Then he too plowed into the hapless tux rental business. After his CFO had blamed the kids and their prom-related rentals, Mr. Ewert blamed brides. I mean, come on. Brides don’t even shop there. But no, he explained, “the number 13 in 2013 is causing a small but meaningful number of brides to avoid getting married this year.”
To end on a positive note, he added, “It’s reassuring to see a significant increase in advanced reservation for 2014 weddings.” Asked to be more precise about these 2014 tuxedo bookings, alas, the miracle fell apart before our very eyes. “It’s a moving number,” he said. “It changes every week. But less than 10% of 2014 is already booked.”
Baloney...
... indicated preemptively Neal Black, CEO of arch-competitor JoS. A. Bank, when his company announced its second quarter earnings debacle on September 5. Its tuxedo rental program “continues to grow each quarter since we launched it in early 2010,” he proclaimed [15]. “And we’re pleased with our spring prom season this year.” The “13” in 2013 that was keeping Men’s Warehouse brides from getting married? No mention. But the tux business was about the only thing that had worked at JoS. A. Bank.
Overall quarterly sales plunged [16] 11% and net income 38% year over year, due to “an ongoing decline in response to our highly promotional marketing campaigns,” Mr. Black explained. These campaigns amounted to something like a buy-one-horribly-overpriced-suit-and-get-three-free strategy, where a guy suddenly ends up with four new suits in the closet when all he originally needed was one. So he isn’t going to buy another suit for a while. The full-closet syndrome had hit JoS. A. Bank.
Not just “softness in the female business”
Fantasies about a strong back-to-school shopping season had already gotten slammed when teen retailer American Eagle Outfitters, back in August, chopped its second-quarter earnings in half and confessed to lousy sales – down 2% overall and 7% on a comparable-store basis. CEO Robert Hanson blamed [17] weak traffic and women who hadn’t bought enough of the stuff on the shelf. “The domestic retail environment remains challenging,” he concluded.
Competitor Abercrombie & Fitch reported its quarterly results the same day. While total sales were down “only” 1% year over year, booming international sales – up 15% overall and up 60% in China on a comparable store basis – papered over a debacle in the US, where sales plunged 8%. CEO Michael Jeffries summed [18] up the US phenomenon: a “challenging environment,” “weaker traffic,” and “softness in the female business.” While “consumers in general” might be feeling better, he ventured, “that’s not the case for the young consumer.”
Alas, by today, his “consumers in general” had gotten the blues too, according to the University of Michigan/Thomson Reuters consumer-sentiment index. It plunged from 82.1 in August to 76.8 in September, the lowest since April. “Economists” on average had expected a flat 82 – they don’t get out much, do they? Particularly brutal was the collapse of the economic outlook index from 73.7 to 67.2, the lowest since January. So, a retail recovery in the second half? Maybe not so much.
Grim retail sales propped up by auto sales on borrowed money
What the clothing retailers had reported individually over the last two months showed up in the official retail numbers from the Commerce Department [19]: it’s tough out there.
On a monthly basis, retail sales inched up 0.2% in August, the smallest increase since April. But consumers were able to borrow, and buy cars: auto sales, which have been roaring all year, jumped 0.9% from July and 12.3% year over year. They accounted for almost one-fifth of total retail sales and pushed up the overall number. Retail sales without autos inched up $200 million, or 0.058% – a rounding error! At general merchandise retailers, it looked grim. Sales of sporting goods, building materials, and gasoline fell. Sales of general merchandise (at department stores, warehouse clubs, etc.), the second largest category, fell below the level of August last year. And sales of clothing, well, they also fell.
Whatever the creative and hilarious excuses of our revenue-challenged retailers might be, reality is that strung-out consumers, whose wages have not kept up with inflation – those lucky ones who have jobs – are prioritizing their purchases. It’s easier than ever to borrow at still historically low rates to buy a car, and that’s what they’re doing. For now. But interest rates are rising....
With Q3 GDP growth tracking 1.6%, Wall Street strategists, whose bullishness has been deafening despite realities on the ground, are starting to hedge their bets with some unusually candid analyses. Seeing overvalued assets everywhere, they’re struggling to find solutions, other than a crash. Read.... BofA: “When Excess Liquidity Is Removed, It Will Get ’CRASHy’” [20]