Men's Wearhouse to Come Up Short in Merger Savings

An analyst questions the math of how the synergies will add up.

Rich Duprey
Rich Duprey
Apr 23, 2014 at 4:36PM
Consumer Goods

Men's Wearhouse (NYSE:TLRD) ought to save $30 million right off the bat from its acquisition of Jos. A. Bank (UNKNOWN:JOSB.DL) by cutting the time and frequency of the ads it runs, but the rest of the savings the clothiers promised in selling the deal to investors might not be so easy to come by. 

According to the Houston Business Journal, a research note published by Stifel Nicolaus says a "high degree of uncertainty" exists over whether Men's Wearhouse can achieve the $150 million worth of savings that it touted. The most its analysts can come up with is $100 million, which is at the low end of what Men's Wearhouse suggested was doable.

Last month, the two men's clothing leaders finally agreed to a deal valued at $1.8 billion in which Men's Wearhouse would acquire Jos. A. Bank, ending a months-long drama with several twists and turns and increasingly vituperative remarks cast on both sides. Although it creates the fourth-largest retailer of menswear, which will have $3.5 billion in pro forma sales, the premium Men's Wearhouse finally agreed to pay means it becomes essential that it wring out all the savings it can.

Stifel Nicolaus says in addition to advertising budget savings, another $10 million can be realized from streamlining the two accounting departments and initiating a round of job cuts for a total of $40 million in the first year. After meeting with the management teams last week, the best it can come up with for second- and third-year savings are some $60 million that would be achieved in part from unified sourcing and IT consolidation. Those, however, are the easy coins found in the sofa cushion. It's going to be much harder coming up with the additional $50 million management says could be possible.

Men's Wearhouse founder and former CEO George Zimmer recently expressed concern that the companies would become too aggressive in making cuts that it ultimately impedes the progress of their integration, and I've noted a concern about getting the two corporate cultures to meld smoothly, particularly after the nasty battles engaged in leading up to the merger agreement. While there doesn't appear to be any serious shareholder opposition to the deal going through -- and because the industry is so fragmented, there shouldn't be any antitrust concerns regarding it -- it doesn't mean the transitions will be smooth.

Having hit almost $59 a share in the aftermath of winning the game, Men's Wearhouse's stock has peeled back nearly 20% from those highs and I see nothing on the horizon indicating there will be a surge in sales coming that would justify a higher valuation at the moment.

The joining of Men's Wearhouse and Jos. A. Bank may be tailored for long-term growth when the economy once again shakes off its lethargy, but that time isn't now and investors would be wise to put the stock on layaway.