2 Stocks Jefferies Just Downgraded; Should You Be Concerned?

• Men's Wearhouse Inc MW shares have plumged 45 percent in the last one month, while shares of Skullcandy Inc SKUL are down 14 percent over the same period.
• Jefferies analysts downgraded the ratings on both the companies from Buy to Hold, while reducing their price targets.
• The analysts cited low visibility into a turnaround as the reason for the downgrade for both companies.

Worsened Visibility Into JOSB Turn

Analyst Edward Plank reduced the price target for Men's Wearhouse from $67 to $32. He said that there was lack of visibility into the timing of an improvement and the earlier expectation of accelerated earnings growth now seemed aggressive.

While Jos. A. Bank Clothiers Inc JOSB was expected to have “a rough couple of quarters,” it delivered a comp decline of nearly 15 percent in 3Q. Moreover, the projected 20-25 percent decline in 4Q “severely impair any sense of visibility on when a turnaround might gain traction, let alone the magnitude,” Plank stated.

Although the performance of the legacy businesses continue to be healthy, signs of an improvement in JOSB's sales “was a key piece to the next leg of the story for which we no longer have clarity,” the analyst added.

Management has reduced 3Q EPS guidance to 46-51c and they are now projecting FY16 EPS at $1.75-$.2.00, down from the earlier guidance of $2.70-$2.90, reflecting high pressure on top-line and JOSB's high fixed-cost structure.

“As a result, our confidence in the accelerated upward earnings trajectory to CY17 is weakened-- this was another critical element to our Buy thesis. Add'ly, we believe materially softer earnings growth could hamper debt paydown,” the Jefferies report noted.

Further Deceleration Into The Holiday Period

Analyst Randal J. Konik reduced the price target for Skullcandy from $17 to $5. He said that the company’s 3Q top-line results and 4Q outlook indicate that the turnaround could take longer than was previously expected.

Skullcandy reported its 3Q revenue short of expectations, due to a miss at the International segment. The company’s 4Q outlook indicates further deceleration into the key holiday period, while this quarter typically contributes about a third of sales and the majority of earnings.

“While this weakness is partially related to issues in transitioning int'l distribution, SKUL is also seeing difficulty lapping challenging compares in its core biz, particularly up against Astro LY,” Konik wrote.

The analyst said that there seems to be much more that is required to be done to fix issues of international distribution than was earlier anticipated. While Skullcandy is making several key changes, which should be positive in the long term, they are adversely impacting the pace of international growth in the near term.

“On top of the sales headwinds, margin pressures should continue for the NT, including FX and the ongoing mix shift towards wireless and gaming. On top of this, the GM should see further NT pressure as the company works through some inventory overhang abroad,” the Jefferies report noted.