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

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.

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.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2888692, ~/Articles/ArticleHandler.aspx, 8/28/2015 3:30:29 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Rich Duprey

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.


Today's Market

updated 6 hours ago Sponsored by:
DOW 16,654.77 369.26 2.27%
S&P 500 1,987.66 47.15 2.43%
NASD 4,812.71 115.17 2.45%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
JOSB $0.00 Down +0.00 +0.00%
Jos. A. Bank Cloth… CAPS Rating: ***
MW $56.90 Up +1.37 +2.47%
The Men's Wearhous… CAPS Rating: **