The normally staid business of selling men's tailored clothing has been a hotbed of proposed deal-making activity this year as the two largest retail leaders in the space, The Men's Wearhouse (NYSE: TLRD ) and Jos. A. Bank Clothiers (UNKNOWN: JOSB.DL ) , try to fend off activist shareholders unhappy with their stock price performance.
The pressure likely led Jos. A. Bank to make a bid for its larger competitor in October, since rescinded, which was followed by a tit-for-tat counter bid by Men's Wearhouse in November. Men's Wearhouse is also in the midst of trying to unload its under-performing K&G superstore unit. So, do investors have a play here?
What's the value?
Men's Wearhouse continues to find top-line growth hard to come by in the tailored- clothing business, reporting an overall increase of 1.2% in FY 2013. With its more than 1,000 stores already crisscrossing the nation, the company has had to primarily rely on greater production from its existing store base, a tall order when more than 57% of sales come from tailored clothing, and customers seem intent on continuing to outfit their wardrobes with casual offerings. In response, Men's Wearhouse has sought to build critical mass in secondary product areas, like corporate apparel and tuxedo rentals.
Higher operating profit has also been a struggle for Men's Wearhouse in FY 2013 due to rising supplier costs in addition to weak store performance at its Canadian stores and in its K&G superstore unit. While the Canadian operations are core to the company's future business plans, multi-year sales weakness at K&G finally sent it to the auction block and is rumored to have caused friction in the boardroom, leading to the ouster of company founder and spokesman George Zimmer earlier this year.
On the upside, Men's Wearhouse's aggressive expansion of its high-margin tuxedo rental business has provided a slight improvement to the overall company's merchandise margin. This should be further enhanced as Men's Wearhouse seeks to build on its leading market position.
Of course, business isn't any better over at Jos. A. Bank, with the company's overall top line declining 2.7% in FY 2013. Like Men's Wearhouse, Jos. A. Bank has struggled with rising product supply costs and decreases in sales volumes, which it has been unable to recover through price increases.
Despite the weak financial performance to-date, though, the company's strong cash position has allowed it to continue opening new stores in a bid to fill out its national operating footprint and attain management's ultimate goal of 800 domestic stores.
A better way to go
While Men's Wearhouse launched a bid for Jos. A. Bank last month, the move seemed designed to put Jos. A. Bank on the defensive, especially in light of its own management's reluctance to engage with Jos. A. Bank on an amicable transaction. In addition, the combination would likely improve the merged company's operating profitability, but it wouldn't present any better growth profile than the companies have as independent entities. As such, investors should probably seek alternatives with well-positioned, growing companies in the men's casual-apparel space, like Oxford Industries (NYSE: OXM ) .
After spending most of its existence focused on the wholesale tailored-clothing area, Oxford Industries has moved headlong into the branded casual-apparel space over the past few years, generating the majority of its current sales from its Tommy Bahama men's lifestyle brand.
While the company's overall sales are only up 7.1% to-date in FY 2013, due to weakness in its tailored-clothing and U.K.-based Ben Sherman units, its Tommy Bahama segment posted a double-digit top-line gain that was the result of strong comparable-store sales and an expansion of its store network. With 90% of the company's sales coming from the domestic side of its business, Oxford Industries' future is also looking bright as it hopes to duplicate its success in select international markets, like Asia and Australia.
The bottom line
As both Men's Wearhouse and Jos. A. Bank approach their respective maximum store thresholds, future growth will have to come from secondary product areas. Indeed, both companies have already started down that path, as Men's Wearhouse has formed corporate apparel and tuxedo rental units, while Jos. A. Bank has slowly entered the tuxedo rental area and has expanded further into casual apparel with its Classic product line, sold only in its growing factory store segment.
While a tie-up is always possible, it doesn't sound like either management team wants to play second fiddle. As such, investors should leave this drama to the speculators and focus on the growing apparel franchise at Oxford Industries.
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