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Jos. A. Bank in Play After Profit Warning; Is It a Short Set-up?

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Jos. A. Bank in Play After Profit Warning; Is It a Short Set-up?

Shares of men's clothing retailer Jos. A. Bank (NASDAQ: JOSB) fell a little better than seven percent on Monday after the company delivered a profit warning for its fiscal first-quarter earnings which are due out on May 29 prior to the opening bell.

Traders should take notice of the setup in this stock going forward, as Monday's losses may only be the beginning of a deeper correction in JOSB. Volume was elevated during the session in the wake of the guidance update, with around 1.4 million Jos. A. Bank shares trading hands versus a 3-month daily average of under 500,000.

Looking ahead, JOSB should remain active in the coming days and the stock may be setting up nicely for a short position. Savvy Wall Street traders have already been betting against a decline in the stock, as around 25 percent of the company's float had been sold short in recent days. This is a very high short interest and suggests that hedge funds and other market players are notably bearish about the stock's future prospects.

Monday's profit warning shows that the short-sellers have done their homework and could be set to rack up more profits in the coming weeks. The Hampstead, Maryland-based retailer said that it expects first-quarter earnings per share between $0.27 to $0.30, which is a sharp decline versus the $0.53 the company reported in the year ago period. Jos. A. Bank cited higher inventory sourcing costs and lower average selling prices for the expected drop in Q1 earnings.

Lower prices in stores suggests that the company is having difficulty managing inventory and that demand has weakened. Prior to the updated guidance, Wall Street analysts were modeling EPS of $0.46 for the first-quarter, so JOSB's outlook comes as a fairly significant surprise to investors. Jos. A. Bank also said that it anticipates a decline in sales of roughly three percent for the first-quarter and lower gross margins due to operational difficulties.

The company's President and CEO R. Neal Black said, "While we were able to control our expenses and improve our advertising efficiency in the quarter, our gross margin was down primarily due to higher inventory sourcing costs and lower average selling prices due mostly to increased percentage of sales of winter clearance products. In addition, our sales declined approximately 3%, primarily in April. Like many other retailers, we were also affected by the unseasonably cool weather."

The CEO also added that his company would focus on returning gross margins to previous levels as well as increasing advertising productivity. In order to achieve these goals, Black said that Jos. A. Bank "will continue to test, evaluate and refine our merchandising and advertising offerings to optimize the appeal to our customers." Although he also pointed out some positive aspects with regard to the business' operations in recent months, his comments suggest some uncertainty at the management level with regard to marketing and merchandising.

The company operates through 606 retail stores in 44 states and the District of Columbia, a nationwide catalog and an e-commerce website, josabank.com.

In addition to the bearish earnings update, the technical set-up for the stock also suggests it may be a short candidate. Prior to Monday's warning, the shares had closed on Friday right at a resistance area in the form of a descending trendline. The decline in the share price on Monday caused JOSB to slice through both its 20-day and 200-day moving averages, although it remains around two percent above its 50-day moving average.

If this support level is taken out to the downside, the stock will have gone from trading above all three of these key moving averages to below them in a matter of days. This is likely to spook long stockholders and could lead to more selling. Another key level to watch in the name will be at $40. On Monday, JOSB closed at $42.90, so it will take less than a seven percent further decline to test this support area which goes all the way back to 2010.

In recent years, $40 has proven to be very significant support as the stock has bounced from around this level around six times previously. Breaching $40 to the downside could unleash a torrent of selling as technical traders exit their long positions. In addition, the stock is now only up 0.75 percent on the year and a move into negative territory for 2013 could also catalyze more selling pressure.

While most of the signs point to lower prices on the horizon for JOSB, traders should also take note of the stock's valuation. At current levels, it is possible that value players may become interested in the name and support the share price. The company has been steadily growing its top-line sales over the last 5 years, and the stock is relatively cheap given its growth clip.

Currently, JOSB trades at a trailing P/E of around 15, a forward multiple of under 13 and a PEG ratio of 1.19. Although analysts are likely to lower their earnings estimates in the coming days, the name does not appear to be significantly overvalued on a fundamental basis. For this reason, traders looking to enter a short position may want to limit their time horizon and cover the trade if the stock quickly dives on a breach of near-term support levels.

Posted-In: Earnings Long Ideas News Guidance Short Ideas Technicals Management Intraday Update Best of Benzinga

 

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