Men’s Wearhouse’s Takeover Target Shows Improvement in the Fourth Quarter

As men’s clothing retailer Jos. A. Bank joins forces with Men’s Wearhouse, the company’s latest earnings met market expectations.

Apr 14, 2014 at 11:37AM

It's practically a done deal. On March 11, Jos. A. Bank Clothiers (NASDAQ:JOSB) and The Men's Wearhouse (NYSE:MW) decided to become one company. After months of negotiating, the final price per share that Men's Wearhouse will pay increased from an initial offer of $55 per share, and with good reason. Jos. A. Bank's latest earnings show strong sales despite being affected by inclement weather.

The new offer price now involves a cash payment of $65 per share or $1.8 billion. The transaction is expected to close in the third quarter of fiscal 2014 . Men's Wearhouse expects to earn $100 to $150 million in synergies to be realized over three years. Some of the operating efficiencies that the combined company should achieve include an enhanced purchasing function and improvements in customer service and marketing. It's expected that staff levels will be reduced as the combined company streamlines its corporate operating structure. Men's Wearhouse does not plan on rebranding Jos. A. Bank, and their retail stores will operate separately from Men's Wearhouse locations. As a result of the buyout, Jos. A. Bank also withdrew its offer to purchase Everest Holdings, LLC, the parent company of Eddie Bauer.

Latest earnings shows sales are improving
Jos. A. Bank is known more for selling discounted merchandise than its takeover partner Men's Wearhouse. However, its non-promotional business showed strength during the fourth quarter of fiscal 2013. The company announced adjusted earnings per diluted share of $1.07, an increase of 9% over the $0.98 reported in the fourth quarter of fiscal 2012. The adjusted figure excluded $0.07 per share worth of expenses related to the takeover and $0.02 per share of asset impairment charges. The reported EPS figure fell at the midpoint of projected earnings estimates.

Jos. A Bank's GAAP numbers, however, tell a different story: net income and diluted EPS for fiscal 2013 fell for the third straight year. Cash flows rose considerably in 2013, as the company decreased its inventory and profited from short-term investments. During the all-important holiday season, the company saw comparable brand sales increase 9.1%, partially offset by bad weather impacting the post-holiday period .

Jos. A. Bank buyout expected to increase customer traffic
Men's Wearhouse expects the merger to expand its customer reach, particularly in its tuxedo rental business. Bad weather appeared to have a worse impact on the company than on its buyout target, as fourth quarter comps decreased 2.5%, and 25% of the decrease was due to weather-related store closures. For fiscal 2013, there was a 1% drop in net sales of $2.2 billion. Consolidated gross margin was down $17.6 million, down 7.8% compared to the adjusted 2012 fourth quarter. The drop in gross margin was mostly due to higher markdowns and a decrease in tuxedo rental revenue, which was affected by higher rental costs per unit.

Faced with a challenging retail environment, Men's Wearhouse resorted to aggressive advertising and promotions. Positive trends were noted for February, as comp sales regained 3% at Men's Wearhouse and 9% at its Canadian retail store Moores. The company is planning a rollout of a new Joseph Abboud merchandise that should hit stores during the summer of 2014.

Merger improves competitive position against department stores
Macy's (NYSE:M) is one of Men's Wearhouse's main competitors, and the large department store has reported double-digit earnings increases in the past five years. In January, the company beat market earnings estimates by 6.5%. Menswear is an important component of the business and the retailer offers its customers a varied selection of merchandise, including several attention-grabbing celebrity-backed products.

In mid-February, basketball star Shaquille O'Neal unveiled a new menswear collection available at 100 Macy's stores and online. The clothing line caters to regular men sizes and it also helps Macy's capture the often-neglected Big & Tall customer, who typically skips shopping at department stores. A niche market, like the Big & Tall segment, can bring in additional profits, even if it represents a small percentage of the overall market. The diversity of Macy's merchandise makes it a formidable rival, and the merger between Men's Wearhouse and Jos. A. Bank. can help the combined entity maintain and expand its customer base .

My Foolish conclusion
The merger will not finalize until the third quarter of 2014 as both companies work to satisfy Federal Trade Commission requirements. Based on the expected synergies already discussed, current investors should expect the merger to increase customer traffic and put competitive pressure on department store rivals. However, it will be interesting to see how the combined company controls costs going forward. Jos. A. Bank's stock is currently trading near its bid price, and a purchase at this time is not recommended. Men's Wearhouse trades at a reasonable 13 times its 2016 earnings, and may be worth a look if the merger proceeds as planned.

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Jun 12, 2015 at 5:01PM

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