After five months of drama, Men's Wearhouse (NYSE:TLRD) finally snared Jos. A. Bank (UNKNOWN:JOSB.DL) 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.
Rich Duprey and The Motley Fool have no position in any stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.