The global menswear market is expected to grow to $430 million by 2016 with over one-third of sales coming from the Americas. However, that hasn't helped the two dominant menswear retailers in the US, Men's Wearhouse (TLRD) and Jos. A. Bank Clothiers (NASDAQ: JOSB), over the last year.
It was big news when Men's Wearhouse fired the co-founder and face of the company, George Zimmer, from his executive chairmanship in June. It similarly made headlines when Jos A. Bank reported disappointing second-quarter sales declines of 11% year-over-year and lowered guidance.
Zimmer doesn't like the way it looks
The news is particularly troubling for Men's Wearhouse, as Zimmer still holds 3.6% of shares and was willing to state publicly he was concerned over the board's management. In turn, the board has said it is not interested in Zimmer's push for a private sale of the company only to saddle it with more debt. Women's Wear Daily cited unnamed financial sources saying that Zimmer has been seeking out private equity to mount a hostile takeover.
In fact, at 6 times enterprise value to consensus EBIT expectations for the year ending January 2014, the company trades at nearly a 30% discount to its peer group. Additionally, 6x EBIT is the lowest multiple of any retailer publicly listed in the United States with a market capitalization over $250 million.
Short interest in Men's Wearhouse has nearly doubled in the last month to 8.5%. Glancing at the usual stats, Men's Wearhouse at a trailing P/E of nearly 14.0 and a price to sales of 0.8, not to mention a 1.9% yield, you might love the way it looks...at first.
Men's Wearhouse reported in June $0.65 in diluted earnings per share of which $0.10 was attributable to a calendar shift creating an earlier prom season. Otherwise, EPS would only have improved by $0.03 year-over-year. Same-store sales at its K&G Stores declined 6.7% and at Canadian Moore's stores declined 7%. The company reports again Sept. 11.
BeaconLight doesn't like the way it looks
The numbers look worse at Jos. A. Bank with a price-to-sales ratio at 1.1, a short interest of 21.3% (still smaller than it was a few months ago at 36.3%), and quarter after quarter of disappointing results. One has to wonder why it is opening new stores and factory outlets when virtually everything is on clearance in stores open a year or more.
BeaconLight Capital, a 1% shareholder, sent an open letter to the Jos. A. Bank board on Aug. 13. The letter charged the stock could be worth $70 a share if only the board would unlock value by finding strategic acquisitions, taking away the acquisition-consultant position (and annual salary of $825,000) from former CEO Robert Wildrick, buying back shares, and installing new independent board members.
Yet, BeaconLight Capital still believes in the company: "At 6 times consensus EBIT expectations for the year ending January 2014, the company trades at nearly a 30% discount to its peer group. Additionally, 6x times EBIT is the lowest multiple of any retailer publicly listed in the United States with a market capitalization over $250 million."
The letter noted the company has been hoarding cash at a percentage Apple would envy, warning Jos. A. Bank could have 40% of its market cap in cash by year end. The entire text can be read here.
As for the EV/EBITDA, Macy's, Men's Wearhouse, and Jos. A. Bank are all around 6.0 with Jos. A. Bank the lowest at 5.6. With such a low multiple and no debt, Jos. A. Bank has been rumored in the past to be a takeout candidate.
These two men's clothing stores have some advantages over department stores: custom fitting and alterations at Men's Wearhouse, more Big and Tall options, and formal wear. However, the average Joe more likely shops at Macy's.
This CEO loves the way it looks
Instead of buying these two menswear retailers with all of their blemishes, consider Fifth & Pacific (KATE). It's a turnaround story of the former Liz Claiborne with the success of its Kate Spade accessories and Jack Spade menswear lines of clothing and accessories.
Jack Spade operates as an independently run subsidiary of Fifth & Pacific. It has 10 brick-and-mortar stores in the US located in high-end shopping districts in major metropolitan areas, an e-commerce site, and wholesale to fine department stores like Nordstrom, Bloomingdale's, Barney's, and 197 other specialty shops.
Fifth & Pacific CEO William McComb believes the brand can grow to $100 million in revenue, especially as it moves into China, now the primo-market of lifestyle brand retail.
For Fifth & Pacific's other brands, Juicy Couture and Lucky, comps were down 11% at Juicy and up 2% for Lucky. Kate Spade and Jack Spade are still its power brands with CEO McComb saying on the second quarter call, "The Kate Spade business continues to expand in all channels and geographies, with total sales up during the quarter 65% to $167 million."
Although at first look Fifth & Pacific's ratios look horrible, with a forward P/E at 58 and an EV/EBITDA at nearly 61.0, analysts see an astounding 925% EPS growth next year as Kate Spade and Jack Spade expand. For some time it's been rumored the company might sell off Juicy Couture, and that would likely propel the stock.
The Foolish takeaway
Fifth & Pacific is in the middle of its turnaround trajectory and still has work to do. It's building a better retailer, however, with the help of two Spades -- Kate and Jack.
Men's Wearhouse is in a transitional period and with its founder claiming management worries him, I have to believe him. BeaconLight Capital may believe Jos. A. Bank can go to $70 with the changes it proposes but hoping for those changes isn't a viable thesis for your money.
