Tailored Brands Inc. – Game Of Loans

People pass by a Men's Wearhouse store in New York June 25, 2013. Men's Wearhouse Inc said it fired founder and Executive Chairman George Zimmer after he pushed to take the company private and effectively demanded to be reinstated as the sole decision maker at the clothing chain. REUTERS/Brendan McDermid (UNITED STATES - Tags: BUSINESS TEXTILE LOGO)

Tailored Brands, Inc. is the old Men’s Wearhouse. The company is an apparel retailer offering suits, suit separates, sport coats, slacks, business casual, sportswear, outerwear, dress shirts, shoes and accessories for men and tuxedo and suit rentals. It operates through two segments: Retail and Corporate Apparel. The Retail segment includes over four retail merchandising brands: Men’s Wearhouse/Men’s Wearhouse and Tux, Jos. A. Bank, Moores, and K&G. Specialty apparel merchandise offered by its retail merchandising concepts include suits, suit separates, sport coats, business casual, sportswear, outerwear, dress shirts, shoes and accessories for men. Women’s career apparel, sportswear and accessories, such as shoes and children’s apparel, are offered at its K&G stores. The Corporate Apparel segment includes corporate apparel and uniform operations conducted by Twin Hill in the United States and Dimensions, Alexandra and Yaffy in the United Kingdom. The company recently signed a large deal with American Airlines to provide all uniforms for employees.

Company History


The first Men’s Wearhouse was opened in Houston, TX in 1973 by George Zimmer and his roommates. Beginning in 1986, Zimmer began appearing in commercials that closed with the company slogan “You’re going to like the way you look. I guarantee it.” Zimmer and his friends grew the brand in the U.S and Canada to over 700 stores before he was fired as Chairman and CEO on June 19, 2013. Zimmer had expressed concerns to the Board about the strategic direction of the company. He wanted more control and it eventually led to his termination. In 2014, Men’s Wearhouse acquired Jos. A. Bank for $1.8B financed by debt. The stock is down more than 75% since the acquisition creating a possible opportunity for investors.

Jos. A. Bank Acquisition


This acquisition was terrible. Just awful. They paid way too much for a deteriorating business. The acquisition price was pushed higher because Eddie Bauer was also trying to purchase Jos. A. Bank (They really dodged a bullet on that one.) I have tried to get my hands on the merger agreement but had no luck. I am really curious as to why they did not have a post-acquisition performance covenant. When I was in graduate school, I was taught to always include this in a deal even if the benchmarks seem easily achievable. Having this earnout covenant would have saved them. The business was deteriorating when they bought it. Most companies want to protect themselves with multi-year post-acquisition performance measures so things like this don’t happen. Not having it has been disastrous to the stock price.

Although the deal was terrible for existing shareholders I believe there is value in the stock today. In 2015, Tailored Brands wrote off $1.24B of goodwill from the acquisition. They paid $1.8B. This would mean that they only received $560 million of value. I don’t believe the deal was that bad. Below is a screenshot of Jos. A. Bank’s balance sheet before the acquisition. Jos BS

Prior to the acquisition, Jos. A. Bank had $935M in assets and only $200M in liabilities. To be conservative, I would write off half of the acquired inventory since we know business has been bad. After that write off, I calculate that $585 million in assets were acquired (935-200-150=585). So we know they acquired about $585 million in assets vs. the $560 on the balance sheet today. This would mean that TLRD’s financials indicate the actual business of Jos. A. Bank is worthless and there were no synergies. We know this isn’t the case. Comp store sales at Jos. have taken a hit but are beginning to recover.

So how did this happen? After TLRD acquired the company, they realized that the business had been deteriorating for some time. As most know, Jos. A. Bank was famous for their buy 1 get 3 free marketing strategy. TLRD realized that this strategy does not breed repeat business. Customers go buy four suits then don’t go back because they don’t need four more. Once they have a few suits, they buy one at a time. TLRD management decided to change the company strategy and get rid of the buy 1 get 3 free strategy. If they paid attention to what Ron Johnson did at JCP, they had to have known that comps would tank. When customers are trained to receive discounts and the discounts stop, they stop going. The good news is the customer satisfaction of customers shopping at Jos. have improved indicating management has infused the stores with the customer service that Men’s Wearhouse is known for.

Debt Situation


To close the Jos. A. Bank deal, they entered into several debt agreements. Below is a summary of the agreements:

  • $1.1B Term Loan due June 2021. Terms: LIBOR + 3.5%
  • $500M ABL Facility loan due 2019. Terms: LIBOR (No borrowings as of 4/30/16)
  • $600M in 7% Senior Notes due 2022.

As of 4/30/16, TLRD had $1.65B in long-term debt. $1.1B is due in 2021 and $600M is due in 2022. I believe that comps are beginning to turn around but I don’t think the company will be able to retire all of its debt on time. This leaves them with a few different options. 1) Cut the 5% dividend 2) Secondary equity offering 3) Refinance the debt 4) Use the ABL facility loan to make principal payments. The company does not seem to be worried about liquidity issues. It appears that they are going to go with option 4 if need be. They seem very optimistic about the turnaround at Jos. A. Bank so they might start generating solid FCF in 2017.

Competitive Advantages


The Men’s Wearhouse brand is very strong. Additionally, online retailers like Amazon are not going to be able to cut into their sales. Men and women are still going to need to get fitted for suits. While they are there, they will buy ties and other accessories. Many of TRLD’s competitors are struggling to compete with Amazon and are seeing slowing traffic. Some of their largest competitors include Macys, Kohls, JCP, Dillards, and Nordstrom. All of these competitors are struggling to find ways to get customers in their stores. As traffic continues to slow in these stores, we will likely see their market share of formal men’s clothing decrease which will benefit Tailored Brands.

The best thing about shopping in Men’s Wearhouse is the customer service. The sales people are promoted to encourage customer satisfaction and loyalty. They are not paid on commission so you don’t get the car salesman experience. The company has a deep breadth of merchandise with a broad assortment of styles. With a nice breadth of products and high customer service, they are able to achieve repeat business.

The Path Ahead


Management has outlined a profit improvement program that is currently being executed. They will close 250 stores across the portfolio in 2016. The breakdown is 90 Jos. A. Bank, 58 outlet stores of MW and Jos., and 110 MW Tux stores as a result from their partnership with Macy’s. The Jos. A Bank stores that are closing are located in saturated markets and are underperforming. All outlet stores are closing because there was not enough differentiation between the full line stores and the outlets, and they don’t make money when you factor in the central overhead. I don’t like brands that have outlets because I believe it damages the brand with cheaper clothes, so I am all for this.

Management has already recognized about $100 million in synergies from the Jos. A. Bank acquisition even with the decline in comps. They remain very optimistic that the brand will return to solid positive comps in 2017. The comps at Jos. A. Bank appear to have bottomed and management certainly thinks the worst is over.

Jos Comps

The overlap between MW and Jos. A Bank customers is very low at about 7%. The Jos. A. Bank customer is older, more affluent, and prefers a traditional style. The MW customer is younger and shops for more trendy styles. Research conducted from management says 85% of customers plan to shop at Tailored Brand stores again.

One of the bright spots from the Jos. A. Bank acquisition was the Joseph Abboud brand. This is an exclusive line of clothes sold by MW that has had tremendous comps over the last year. This spring, they launched the Reserve designed by Joseph Abboud and it has done very well. Management expects this line of clothes to continue to grow.

TLRD management wrote off all of the goodwill ($769M) from the acquisition and ($426M) in tradename impairment. Today they have $113M left in tradename carrying value related to Jos. A. Bank.

Valuation


There are a few ways to look at the valuation. The stock is down 75% since the Jos. A. Bank acquisition even though it is only 25% of the overall business. The MW, K&G, and Moores stores are doing quite well. We know that TRLD acquired roughly $585 million in hard assets from the Jos. A. Bank transaction. In addition, they still have $113 million in tradename carrying value and they have achieved about $100 million in synergies. Prior to the acquisition, Men’s Wearhouse, K&G, and Moores had a combined market value ranging from $2.1B-$2.8B. These brands have all done well since the merger.

Jos SOTP

Prior to the merger, MW had a base market value of about $2.4B. If we assume Jos. A. Bank is worth nothing and deduct today’s debt you get to a market value of about $750 million which is today’s market cap. The market is throwing in Jos. A. Bank for free. Management is very optimistic that Jos. A. Bank will have a solid 2017. I believe Jos. A. Bank is worth $600 million today meaning the stock is worth about $27. This represents about 90% upside.

Disclosure


 

Long TLRD

Post Properties – Millennials Driving Steady Growth

Post HeadlinePost Properties, Inc. is a self-administrated and self-managed equity real estate investment trust (REIT). The company’s segments include Fully stabilized (same store) communities, which includes apartment communities that have been stabilized for both the current and prior year; Newly stabilized communities, which includes communities that reached stabilized occupancy in the prior year; Lease-up communities, which includes communities that are under development, rehabilitation and in lease-up but were not stabilized by the beginning of the current year, including communities that stabilized during the current year; Acquired communities, which include communities acquired in the current or prior year, and Held for sale and sold communities, which include apartment and mixed-use communities classified as held for sale or sold. Its operating divisions include Post Apartment Management, Post Construction and Property Services, Post Investment Group and Post Corporate Services.

Management


The management team of Post is terrific. They are very patient in acquiring land to ensure their moves are accretive to shareholders. Once land is acquired, it is developed quickly into high quality, well appointed communities. As communities mature, Post periodically sells communities when valuations are full and redeploys capital into new opportunities. Management has a great track record of returning cash to shareholders and has continued to do this consistently. Post recently announced they have signed a joint venture agreement with a Denver based builder that paves the way for Post to re-enter the Denver market. They sold their last community in Denver in 2007. Pretty good timing.

When Post looks for opportunistic markets, a key attribute they look for is above average job growth. Management has been very selective in entering new markets. The brand is established in existing markets and renters know the apartments are fairly priced. Entering new markets requires Post to spend money to establish the brand. Management believes that there is a terrific opportunity to re-enter the Denver market and do very well.

Portfolio


Post holds a very strong portfolio of communities. Thier two largest markets are located in Atlanta and Dallas. Each of these respective economies have had strong rent occupancy rates. A screenshot of Posts entire portfolio is below.

Post Communities

The only market that hasn’t been strong in the last year is Houston due to the dip in oil prices. However, oil prices have stabilized and Post is seeing improvement. All of the other markets have been very strong with solid renewal rates.

Dispositions


Equity REIT’s require a bit of extra thought from potential investors. I believe that Post has one of the best real estate portfolios in the business. They have historically done very well in their dispositions which has allowed them to reinvest in new opportunities. Below is a screenshot of dispositions.


Post Dispositions

It is very common for Post to sell their communities with large gains due to depreciation rules set by the Financial Accounting Standards Board (FASB). Post depreciates its properties on a straight-line basis over 40 years. However, it is common that real estate prices will rise over time creating a large variance between book and market values. Because of Post’s terrific real estate portfolio, I believe they are accumulating large gains on top of the growing rent cash flows.

Funds From Operations


The metric that I am using to value Post is Funds from Operations (FFO). This metric was created by the National Association of Real Estate Investment Trusts (“NAREIT”). It is defined as net income available to common shareholders determined in accordance with GAAP, excluding gains (or losses) from extraordinary items and sales of depreciable property, plus depreciation of real estate assets, and after adjustment for unconsolidated partnerships and joint ventures all determined on a consistent basis in accordance with GAAP. Below is Post’s FFO.

Post FFO

I expect Post to earn $3.25 in FFO in 2017 which prices the stock at about 19x forward FFO and this excludes gains on deprecated communities. I think the hidden value in the stock are these gains that are accumulating. I don’t expect large rent growth over the next ten years but I do believe the value of their portfolio will continue to grow and appreciate.

Millennials


The Post brand holds value with Millennials. Post apartments are seen as hip and they have great locations. Post is in a secular market that is being driven by the massive amount of student debt.

Student Loan Debt

There is currently $1.3 trillion in student loan debt and it continues to grow. It is projected there will be $15 trillion by 2030. We are in a new environment where Millennials want luxury accommodations but most can not afford to own a new luxury home. Instead, they are going to rent nice apartments from companies like Post Properties. It will take years for the mid to late Millennials to get out from their student loans and be in a position to own a new home. In addition, this isn’t just going to be a trend with Millennials. Generation Z will have this same problem. Actually, it could take Gen Z longer to get rid of their student loans which means they will have to postpone purchasing their dream house for even longer.

I believe the large amount of student debt is driving the demand for apartments. However, there is a theory that Millennials are adverse to making large purchases and enjoy moving around. Research indicates that Millennials move around more than prior generations. We just don’t know what is driving this behavior. If Millennials could purchase houses, would they do it and stop moving around? Who knows, but it doesn’t matter. We know that Millennials are soaked in debt and they are moving around. This is a good environment for Post.

Financial Overview


Post Financial Overview

The financial overview of Post is pretty simple. As mentioned, the way that I value the company is using the FFO. Historically, the stock has traded with a FFO between 16 and 22. Today we are right in the middle at 19. I believe that this is a fair price to pay considering the environment we are in. After all, the 10 year yield is hovering around 1.55% and Post yields a healthy 3% dividend.

Bottom Line


 

Post Properties has an extraordinary portfolio of properties. These properties have exceptional locations and are seen as hip to Millennials. The amount of debt that is weighing on the Millennial generation is not going away. I believe that we are going to continue to see strong demand for luxury apartments be driven by student loan debt. Post is a growing business with a nice yield and has phenomenal management. I think investors have a lot to look forward to.

Disclosure


Long PPS

 

Subprime Auto Loans Are Not The Next ‘Big Short’

Subprime Auto HeadlineThe auto industry is facing many different headwinds right now. The industry is incredibly cyclical and many people think that we have just seen peak auto sales which means auto manufacturers might struggle to sale cars over the next couple years. Over the last couple years auto manufacturers lowered lending standards to stimulate sales. Today, the average loan term for new cars is 68 months and it is 63 months for used. Both of these have never been higher. The average amount financed for a new vehicle is $28,802 which has never been higher. The average length of loan has been extended to help individuals have lower monthly payments but for a much longer period of time.

At the beginning of 2016, auto loan delinquencies creeped higher as a result of low oil prices. Americans were getting laid off from the oil and gas industry and consequently were not able to pay for their vehicles. This is no longer happening as often since oil prices have stabilized in the last few months. When auto loan delinquencies were on the rise, many people took it as an opportunity to scare people into thinking another bubble was about to pop. However, I do not believe this to be the case for many reasons. I think they will need to look elsewhere for the next big short.

The 2009 recession resulted in a major slowdown in auto sales. Only 9.3 million vehicles were sold in 2009. This created a lot of pent up demand which has worked its way out over the last seven years. Most Americans need financing to buy vehicles which has resulted in expansion of the auto loan market over this time period. This is a very normal occurrence, not any kind of bubble. Additionally, synthetic securities tied to auto loans do not exist and probably never will. Synthetic securities tied to mortgages were the primary reason for the financial crisis.

People have forgotten that vehicles and homes are completely different assets. The default process around vehicles is completely different from houses. Looking back at data from the housing crisis, it took 194 days to complete a foreclosure in Arizona; 335 days, or almost a year, in California; 520 days, or about 1 1/2 years, in Nevada; and 858 days, or almost 2 ½ years, in Florida. By way of comparison, in New York it takes 1,072 days to foreclose on a residence. As the foreclosure process goes on, most houses are abandoned resulting in plummeting values. Consequently, neighboring property values also decline. Today, when people default on their automobiles, they are repossessed almost immediately. The legal process is extremely fast so there is minimal value lost on repossessed vehicles. They can be resold quickly mitigating losses from the bad loans.

Another differentiating factor from the housing crisis comes from financial institutions. Lending risk models have been closely scrutinized since the financial crisis and are much improved. Even when defaults occur, losses are minimal because loan-to-value (LTV’s) are heavily scrutinized. Probability of default’s (PD) and loss given default’s (LGD) are updated more frequently and watched closely. No financial institution will be taking on large losses because lending models on subprime loans incorporate the risks the bank is taking. In the event that there is a default on a loan, the vehicle can be repossessed and resold minimizing loses. This process has almost no drag on the economy.

When financial institutions underwrite a subprime auto loan they often require the borrower to have their car equipped with a device that allows the lender to disable the car remotely. These devices include GPS technology so the lender can communicate the location of the vehicle if it needs to be repossessed. These devices make repossession incredibly fast.

In addition to the devices mentioned, there are hundreds of different license-plate-readers on the roads today. These are often found at airports, toll plazas, major highway entrances, parking garages, and selected intersections. Developing databases of scanned license plates is a growing business. Financial institutions are willing to pay to have access to this information.

Bottom Line


Subprime auto loans are completely different than subprime mortgages. There are glaring differences between the two products. The biggest difference between them is the amount of time it takes to repossess a vehicle versus foreclosing on a house. Repossessing a vehicle is quite easy and the asset can be resold in a timely fashion which keeps the lenders losses minimized.

Lending risk models are much improved on all loans since the financial crisis. Financial institutions are reviewing their loan files more often and are much more conservative than they were ten years ago. It is very possible that auto sales may slow down in the next 12 months. However, I do not see any similarities to the housing crisis and I would certainly not call the growth in subprime auto loans a “bubble.”