On the surface, the earnings report was quite good. Add to that the absence of a pre-earnings runup in stock price, and we have to ask why did the stock tank so hard on the news?
Perhaps we need to read between the lines of Crossman's commentary during the conference call:
"...Our Joe's women's wholesale channel was flat on a comparative basis. We see the continuation of color and print, but on a smaller scale."
Smaller scale? Interesting choice of words. That could be code for "the fad is ending". Perhaps Crossman is foreshadowing another huge write-down on inventory which will kill margins. Last year it was a $1.6 million write-down to market value of the jean leggings and non-denim pants. Next year it could be a $2 million write-down of the extravagantly wide color denim line.
"...This season, we tested a Vintage Reserve program at a cross-section of the best department specialty store retailers. The tests were extremely successful. We will build upon our Vintage Reserve program in the back half of the fourth quarter and early spring. Further, we will support this program with a marketing and advertising campaign."
So, I guess we should prepare for another wild spending spree as they indulge themselves in yet another one of their famous advertising campaigns, where they always seem to manage to get the least bang for their excessive buck, resulting in the usual capped margin and EPS metrics -- and setting investors up for an earnings disappointment.
Speaking of revenue, there could be a problem looming with retail sales growth. Looking at sales on a sequential basis (Q3 vs. Q2), you'll see that wholesale revenue grew nicely, while retail revenue actually declined!
Wholesale revenue Q3: $24.8 million
Wholesale revenue Q2: $22.9 million
Retail revenue Q3: $5.5 million
Retail revenue Q2: $5.7 million
Why is wholesale revenue up so much on a sequential basis, while retail revenue is down? Even more alarming is that they had more retail stores opened in Q3 than in Q2 (i.e., 25 retail stores in Q3 versus 23 stores in Q2). So how the heck do retail sales decline while there were actually more retail stores open? It can't be due to seasonality because wholesale was up nicely over the same time period. So why the divergence between wholesale and retail sales growth?
Perhaps this is another reason why the stock may have tanked on day of earnings. There is some doubt about the success of their retail store strategy. Notice that same store sales are trending down the last 3 quarters also. Still in the positive, but a definite trend.