If you're looking for drama, don't bother going to a Broadway show or a movie. You can find drama by staying at home and watching news come out of Men's Wearhouse (TLRD). Let's take a quick look at the company's most recent drama, and whether it might present an investment opportunity.
Recent drama
Jos. A. Bank (NASDAQ: JOSB) offered $48 per share, or $2.3 billion, for Men's Wearhouse. This would create the largest men's apparel company and retailer in the United States. Combining Jos. A. Bank's 623 retail stores and Men's Wearhouse's 1,249 retail stores would put the merged company on the path to 2,000 locations. The merged company would have a stronger position for capturing market share from competitors. (Source: http://phx.corporate-ir.net/phoenix.zhtml?c=113815&p=irol-newsArticle&ID=1863208&highlight=)
If you're looking at this situation from a logical perspective -- without knowing what's going on behind closed doors -- Men's Wearhouse should seize this opportunity, primarily because the company itself admits that the macroeconomic environment is weighing on results. For instance, Men's Wearhouse second quarter net sales declined 2.3% year over year. Retail sales dropped 1.9% and gross margin suffered a 3.6% decline.
If you break down the retail segment a little more, there aren't many reasons to be optimistic. The company's namesake brand Men's Wearhouse, which is responsible for 66% of sales, saw a 0.7% decline in net sales year over year. Moores (Canadian retailer), responsible for 12% of sales, saw a 4.9% drop in net sales. K&G (fashion superstore for men, women, and children), responsible for 13% of sales, suffered a 5.7% sales decline. Corporate apparel, responsible for 8% of sales, saw net sales plummet 6.6%.
Furthermore, due to "macroeconomic effects on retail," Men's Wearhouse has lowered its fiscal year 2013 earnings per share guidance to $2.40-$2.50, while also reducing its comps growth projection by 2% at Men's Wearhouse and Moores.
When Men's Wearhouse received the offer from Jos. A. Bank, it promptly stated that Jos. A. Bank was undervaluing the company. Jos. A. Bank retorted that the offer creates immediate shareholder value, and that a $48 per share price would represent the highest trading level for Men's Wearhouse over the past five years. (Source: http://phx.corporate-ir.net/phoenix.zhtml?c=113815&p=irol-newsArticle&ID=1863208&highlight=)
You might be wondering if there's an additional reason why Jos. A. Bank wants to purchase Men's Wearhouse. A picture, or at least a chart, truly is worth a thousand words:
MW Revenue TTM data by YCharts
Jos. A. Bank needs to grow its top line, and it can do so if the deal is completed. However, despite current negative industry trends, Men's Wearhouse believes it can manage the storm via strategic capital allocation, margin enhancement, new store openings, the expansion of exclusive brands, and omni-channel marketing initiatives.
If this deal ends up getting done, then upside still exists for Men's Wearhouse, but you would have missed the brunt of the move. If the deal falls through, then downside risk is high. Because Jos. A. Bank is looking for a solution to its current problems, it doesn't appear to be an ideal investment in men's apparel either. Perhaps a better option exists.
Bigger is sometimes better
Macy's (M -1.52%) sells more than men's attire. It offers almost everything Men's Wearhouse and Jos. A. Bank offer, including suits, outerwear, polos, casual shirts, and much more.
Like Men's Wearhouse, Macy's has reduced its full-year guidance. Macy's now expects comps to grow at a 2%-2.9% clip versus an earlier expectation of 3.5%. Macy's now expects EPS of $3.80-$3.90 versus an earlier expectation of $3.90-$3.95. This reduced guidance has a lot to do with increased promotions. These promotions are necessary to drive traffic to Macy's stores, which then cuts into margins and negatively impacts earnings.
Macy's plans on opening its stores at 8 p.m. on Thanksgiving night, potentially giving it a head start on other physical and online retailers. Macy's is also hiring 3.8% more staff members for the holidays than last year, which indicates that Macy's is being aggressive.
Unlike Men's Wearhouse and Jos. A. Bank, and part of the reason Macy's is more appealing, is that Macy's has more specifically defined initiatives to help fuel growth. One initiative is called My Macy's, which allows customers to shop ahead. In other words, if you would like to purchase a couch at a nearby store, you can enter your zip code online and then view the specs for that couch. The same applies to dresses, coats, and almost anything else in the store.
The other initiative is called Magic Selling, which is an acronym for the company's sales force:
Meet & Make Connection
Ask Questions and Listen
Give Options, Give Advice
Inspire to Buy
Celebrate the Purchase
Considering all factors, Macy's is likely to offer a better long-term investment opportunity than Men's Wearhouse or Jos. A. Bank -- if there's no deal between the two.
At the register
While upside potential still exists for Men's Wearhouse, the stock is up 31% over the past month primarily thanks to the potential for a deal. This already-seen massive stock appreciation combined with the company's concerns about the retail environment don't equate to the likelihood of a strong investment going forward.
