We are not asking that management flag weakening gross margins or higher promotional costs or brutal competition that is causing them to lose share and miss numbers.
But I think it is perfectly reasonable for a company's management to acknowledge and, indeed, shine a light on what went wrong or is going wrong when management knows that something's not up to snuff. That's right, I am not demanding a qualitative mea culpa and a begging for mercy. However, I do think that a simple acknowledgement in the text of the release and the conference call that something's wrong, and it can't be ignored, is not too much to ask.
Yet for some companies, sadly, it must be demanding too much because their relentless happy talk in the face of what they have to know is a disappointing set of facts, is, if anything, doubly disturbing.
That's what I thought about after last night's entirely disappointing Tailored Brands (TLRD) quarterly conference call, the amalgam that is, among other brands, Men's Wearhouse and Jos. A. Bank.
And it's what I thought about that Tuesday night, on that horrendous, tortured H&R Block (HRB) call after it tried to put a positive spin on what is at best a very uncertain future.
I know there was a lot of skepticism when Men's Wearhouse bought Jos. A. Bank back in March of 2014. Men's Wearhouse paid $1.8 billion for the rival, which was widely perceived as vastly too high a price for the prospect. Given that the combined company now has a market cap several hundred million dollars below that price, it seems like an ill-advised trade, especially given that the acquirer had about a $2.2 billion capitalization at the time of the deal.
However, if you go back in time, to when Tailored Brands stock traded down to $664 million in 2016, it's not all that bad. Even better, this stock has gone from being a real loser to a real winner having traveled from $9 last year this week to $33 as of last night. That's almost a four-bagger.
Which is why it is so mystifying that the company didn't say there could be some issues with gross margins going forward or at least give you some signal that business could be more promotional in the next couple of quarters, certainly more promotional than others in the red-hot apparel category. Nope. Everything was entirely rosy. Everything. There wasn't a single cautionary word. In fact, you would have thought Tailored Brands had blown out every metric until you got to two-thirds of the conference call, buried in the Q&A when an analyst named Paul Trussell from Deutsche Bank asked the company to "hold our hands a little bit" about the upcoming quarter's selling general & administrative costs as well as its gross profit margins.
I would say you could have heard a pin drop when the question was asked, but, of course, these are telephone affairs so that would be strictly metaphorical. It was a total wipe out from there going forward. The duck had come down and rendered its verdict: guilty, both in performance and lack of credibility.
We got almost the exact same thing when H&R Block reported a quarter that sent its stock into an S&P 500-leading tailspin the day before. Everything was fabulous until you got to the Q&A when the analysts were totally unnerved about the upcoming spend and store closings that were a sign that the company had fallen well behind industry leader Intuit (INTU) , by using a brick & mortar hybrid web strategy that now appears to be technology-lite and troubling.
I think that had Block been more forthcoming about its issues, the blow would have been softened. I feel the same way about Men's Wearhouse. The latter should feel no inhibitions whatsoever given how well it's done for shareholders. But it didn't want to go there.
What should these companies have done? A few years back Palo Alto Networks (PANW) had similar issues to both of these companies. The sales numbers grew light and there was pain to be taken. So, then CEO Mark McLaughlin took it and said that there were issues with his sales force and they weren't dealt with well and they had to be fixed. It was a total 100% mea culpa. The stock got hit, but Mark's credibility was intact and soaring when he fixed the issues and the numbers bounced back. Had he not addressed them so forthrightly I wonder if the stock would have ever reached the lofty levels it did when he recently retired.
The same thing happened a few years back with CEO Aneel Bhusri at Workday (WDAY) . He had numbers that looked good on the surface but he called attention to some deals that hadn't closed and how bummed he was that he didn't deliver as he had in the past. The stock took a hit, and then it zoomed and never looked back when sales bounced back the next quarter.
If either HRB or TLRD is just hitting a speed bump, as may be possible, then explain it, own it and move on as Workday and Palo Alto did. Otherwise? All I can say is, now that they failed to be as forthcoming as can be reasonably expected about their coming shortfalls, I am now deeply troubled by both these two companies, much more troubled than I would have been, had they just laid out their stories as problematic, explained how they can fix the problems and then move on positively and constructively from here.