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Two Retailers Tale of Slowing Growth

By Lawrence Rothman – Feb 24, 2014 at 4:38PM

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Men's Wearhouse and Jos. A. Bank must show evidence of faster growth before purchasing shares.

The death knell has apparently rung on a Men's Wearhouse (TLRD) and Jos. A. Bank Clothiers (NASDAQ: JOSB) combination. The saga apparently took its final turn when Jos. A. Bank agreed to purchase privately held Eddie Bauer. Presumably, Men's Wearhouse and Jos. A Bank will get back to business, rather than concentrating on M&A activities. Does this mean you should scoop up shares in either company?

The answer is, not yet. Although this removes a distraction, and perhaps both management teams will focus on operations, investors should wait until they see faster growth from both companies before investing in either one.

The twists and turns
Jos. A. Bank announced it would purchase retailer Eddie Bauer for $825 million in cash and stock, with the potential to pay an additional $50 million based on Bauer's earnings this year.

Most agree this will make the purchase price for Jos. A. Bank too high, and even Men's Wearhouse said it would evaluate its options in light of the latest development.

A little history might be in order. After George Zimmer, the founder and CEO of Men's Wearhouse was forced out last June, he and the board had an ensuing war of words. However, the company was put in play as it was reported the executive was talking to private equity players about buying out the company.

An intrigued Jos. A Bank put in an offer to purchase the retailer in early October. The all-cash proposal offered stockholders $48 a share, or an equity value of $2.3 billion, which Men's Wearhouse swiftly rejected.

In late-November, Men's Wearhouse became the aggressor, making a $55 all-cash offer for Jos. A Bank. This equated to an enterprise value of $2.1 billion, and a 45% premium to what Men's Wearhouse called the unaffected enterprise value.

Ultimately, Men's Wearhouse submitted a hostile $57.50 bid and sought two board seats.

The struggles ahead
The rationale for Jos. A. Bank's purchase of Eddie Bauer is not a bad one. The latter sells sportswear, outerwear, and gear to those with an active lifestyle, which appeals to a different demographic than the visitors who browse the men's suits at Jos. A. Bank. It will run as an independent enterprise, which should boost the chances of the deal succeeding. The deal will immediately add to earnings, according to management.

Sounds like good news, except Jos. A. Bank is pursuing faster growth via acquisition because its own trajectory has been decelerating. Comparable store sales dropped by 8.5% for the first nine months of the year, and diluted earnings per share fell by 30%, to $1.28. The bottom line, which was $36.0 million, declined by more than $15 million, with legal and professional fees related to its pursuit of Men's Wearhouse accounting for only $1.2 million.

Last year was not so hot, either. Comps fell 0.5% in 2012, and diluted EPS declined by 11.7%, to $3.08 as traffic slowed in its stores, and costs for its merchandise rose while it increased spending on advertising. Adding to its woes, margins were also hurt due to markdowns. However, prior to that, the retailer was growing at a nice clip. In 2010 and 2011, earnings grew by better than 20% in each year, before expanding at a still very respectable 13.3% in 2012 as more people visited its stores along with nice growth in its Internet channel.. 

Meanwhile, results at Men's Wearhouse are nothing to write home about, either. For the first nine months, comparable store sales were up just 1.6% at its namesake brand, which accounts for two-thirds of its total sales. Comps were negative at its Moores and K&G brands. Diluted earnings per share dropped 12.6%, to $2.29, despite the share count falling by 2.8%.

Final thoughts
The shares of both Men's Wearhouse and Jos. A. Bank, trading at 19 times and 24 times earnings, respectively, have not been put on the discount rack just yet. Investors would be prudent to wait until evidence of renewed growth surfaces before committing money to purchasing shares. Otherwise, you may find you cannot afford the suits these companies sell.

Lawrence Rothman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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