Investors Should Avoid Trying to Tailor Men's Wearhouse to Their Portfolios

It's a deal that made sense, but the hard part is only just beginning.

Mar 25, 2014 at 10:02AM

After five months of drama, Men's Wearhouse (NYSE:MW) finally snared Jos. A. Bank (NASDAQ:JOSB) in a $1.6 billion merger that will create a mammoth men's suits retailer with 1,700 stores, 23,000 employees, and an estimated $3.5 billion in annual sales. The real challenge comes when they have to make those $100 million to $150 million in supposed synergies they touted become reality.

Last week, Men's Wearhouse ex-CEO George Zimmer finally commented on the deal involving the company he founded, and though in a statement to Fortune he said he's generally supportive, he also says he's seen too many mergers fall apart after the fact because of a near-sighted devotion to cost-cutting. He breathes life into a worry that I've expressed could see this deal come apart at the seams.

Images

Certainly, there will be supply chain efficiencies realized, and extending Men's Wearhouse's profitable tuxedo rental business to Jos. A. Bank may bring in more revenues by expanding the base. Tux rentals, after all, accounted for more than 16% of Men's Wearhouse's revenues in 2012, enjoying gross margins of 86% and around a quarter of all profits. But there are two different cultures and two separate target customers that suggest it won't be so easy to cut costs. let alone meld together, as many people perhaps think.

The Men's Wearhouse customer is generally seen as younger and trendier; Jos. A. Bank's, more classical and conservative. While having the two demos under one roof gives the company an expanded base, both are looking to market to a middle-class consumer that's been hammered by the recession and slipping away. It's the businesses at either extreme -- the deep discounter at the low end and the luxury retailer at the upper -- that have done well these past few years. Those in the middle have had a tougher go of it, which partly explains why department stores like J.C. Penney and Kohl's, two chains against which a combined Men's Wearhouse and Jos. A. Bank will find itself competing, have faltered.

Census Bureau data shows that median household income fell from $55,627 in 2007 to $51,017 in 2012, and with the long-term unemployed rising to 3.8 million people, the unemployment rate standing at 6.7%, and the civilian labor force participation rate remaining at just 63%, it's a tough market to sell suits to.

While menswear has been one of the few areas that Penney and Macy's recently said bolstered otherwise lackluster Christmas-season sales, and the niche has outpaced the growth in women's fashion, both men's retailers employ a discounting ritual that can leave little room for extreme cost-cutting. Moreover, since Men's Wearhouse is (wisely) keeping the Jos. A. Bank identity, there will be reduced opportunities to nip and tuck expenses as it could if one company simply was subsumed by the other.

Suit sales can be as stodgy as the suits themselves, moving up slowly though fairly steadily. While the recession likely took out more than just a few of the marginal players, there's been the growth of online sales that adds a new wrinkle to the competition that won't make the process of integrating the two rivals any easier.

It's not that I think this merger will falter, since like George Zimmer I'm generally supportive of the consolidation taking place, but Men's Wearhouse has risen by more than 50% since this whole buyout drama began last October and is up 62% from its 52-week low. I just wouldn't be trying its stock on for size in my portfolio at this stage of the game.

Two stocks changing the retail world
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

Rich Duprey and The Motley Fool have no position in any stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers