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

Leave a Reply

Your email address will not be published. Required fields are marked *