Unemployment plunged from 9 to 8.6% in November. That's the first time the jobless rate has been under 9% since March. If companies are indeed hiring, interviewers are going to need some new suits. Should investors capitalize by purchasing shares of popular suit makers? (For related reading, see How Unemployment Affects You.)
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.
Labor Trend Going In Right Direction
Payroll jobs jumped 120,000 on top of a 100,000 gain in October and 210,000 during September. Granted, a big part of the headline improvement is due to reduced participation in the labor market (workers returning to school, discouraged workers not being counted, etc.). There's still reason to believe that employers are hiring. Real unemployment, an unofficial measure of joblessness that includes discouraged workers, improved from 16.2 to 15.6%. These employment gains do reflect relatively tame economic growth, however, the trend is going in the right direction.
A steady decline in weekly jobless claims supports the trend. Initial claims fell 4,000 to 364,000 in the week ending December 10. Continuing claims declined 79,000 to 3.546 million. Again, some of the improvement is due to drop off. Nevertheless, fewer jobless claims bode well for the labor market. (To learn more, read Economic Indicators: Jobless Claims Report.)
Clothes Help Make the Candidate
If hiring is on the uptick, business apparel should see an increase in traffic. In terms of tailored and business casual attire, mid-tier suit sellers Jos. A. Bank Clothiers (Nasdaq:JOSB) and The Men's Wearhouse (NYSE:MW) are well positioned to capture market share, rather than big retailers like Macy's (NYSE:M).
Jos. A. Bank is a popular destination for suit shoppers looking for a deal. Third quarter net income rose 19% to about $15 million on a 21% increase in sales. But, investors have been hard on Jos. A. Bank shares over the past couple of months. Even though their sales are a big draw with customers, they can be a double-edged sword. Margins fell by 140 basis points due to discounting that did not help mask higher input costs. One area where there may be some margin relief is online sales where Jos. A. Bank is seeing tremendous growth.
Where Jos. A. Bank realized higher sales on aggressive promotions, third quarter results for Men's Wearhouse were driven by increases in average unit selling prices. Net sales increased 6.3% during the quarter ended October 29. Higher price points helped increase gross margins 14.1% to $268.2 million, despite fewer transactions per store. Men's Wearhouse has a big tuxedo segment as well, which serves as a very strong entry point for attracting retail customers.
It will be worth watching to see if Men's Wearhouse, along with specialty retailers like Express, Inc. (NYSE:EXPR) and Banana Republic of The Gap Inc. (NYSE:GPS) that also sell suits, try to raise price points beyond the discounting holiday season. In the current environment, there could be resistance against attempts to move prices higher. It may be necessary if raw material costs remain elevated. Cotton peaked in the third quarter, and wool has stabilized at very high prices. Men's Wearhouse has increased its private label mix to absorb some of the raw material price increases. Additionally, their stocks of raw materials and inventory are high to weather any near-term price shocks. (To learn about how companies hedge against the rising costs of raw materials, read Commodities: The Portfolio Hedge.)
The Bottom Line
Both Men's Wearhouse and Jos. A. Bank are in a great position to capitalize on cost-conscious would-be job seekers. Another positive catalyst is the potential to capture market share from Syms Corporation, which filed for bankruptcy in November.
The upside augments as employers look to add headcount, yet there are risks. On top of inflationary headwinds, the better employment situation isn't assured yet, and wage growth has been very poor. The reality may be that improvements in the employment picture might be artificial, and workers aren't seeing income growth that would materially impact overall consumer spending. Look to the December unemployment report, due out on January 6, for confirmation of last month's mostly positive employment trend.
If the tide has turned in the right direction, suit stocks might be in for a windfall. Since the beginning of the recovery, Jos. A. Bank and Men's Wearhouse have traded similarly. Over the past three months, there's been divergence with Jos. A. Bank underperforming Men's Wearhouse. Effective cost control, margin expansion and growth prospects in the Big and Tall division have given Men's Wearhouse the momentum since the beginning of December. A sustained recovery in employment would have Men's Wearhouse looking very sharp. (For more information on investing in the retail sector, read The 4 R's Of Investing In Retail.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Matt Cavallaro did not own shares in any of the companies mentioned in this article.