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Nelson Hsu
Nelson Hsu
Articles (105) 

Looking at Men's Wearhouse After Its 17% Decline

Jos. A. Bank acquisition has not performed well

December 11, 2015 | About:

Men’s Wearhouse (MW) stock fell $3.12 Thursday, or 17%, to a closing price of $15.27 per share. The price represents a partial recovery as shares fell to a 52-week low of $13.55 during the trading session.

The company has 1,748 stores in the U.S. and Canada and primarily sells men’s clothes such as suits, sport coats, shirts, shoes, etc. The market did not like the company’s earnings report.

Highlights from Thursday’s third quarter 10Q:

  • Net sales decreased 2.8% for the quarter to $865 million. Total net sales for the first nine months was $2.67 billion.
  • The company breaks sales out into the retail, rental services and alteration categories. For the first nine months of 2015, the categories accounted for 72.3%, 14.7%, and 6% of sales respectively.
  • Total retail sales increased $355.3 million, or 16.7%, to $2.48 billion for the first nine months as compared to the first nine months of 2014 due mainly to $289.7 million of incremental sales from Jos. A. Bank (JOSB). The company reconciles performance for the first nine months to 2014 by breaking down each retail component.
  • We can see the Men’s Wearhouse and K&G stores did well from the table above.
  • Last year, the company bought Jos. A. Bank which has not worked out well.IMOhR5lraOv6jFYSSgMUkVpD_0tIiekF6ttEuW3-
  • Jos A. Bank’s sales fell 14.6% for the quarter. Sales were $198.9 million vs. $233.3 million for the same quarter last year.
  • The company had to take a pretax, noncash Jos. A. Bank trade name impairment charge of $90.1 million which contributed to a diluted loss per share of 56 cents.
  • If sales at Jos. A. Bank continue to fall, there may be more impairment charges in the quarters ahead.

From the third-quarter earnings call, management cited the elimination of Jos. A. Banks’ famous “Buy-One-Get-Two-Free and Buy-One-Get-Three-Free” promotions as reasons for the steep sales decline.

CEO Doug Ewert explains, “What we did not know then but do now was just how toxic some of the promotions were and how deep and far reaching the transformation required would be. And how significantly near-term performance would suffer as we began to execute painful but necessary steps to restore the long-term sustainable profit model and reshape the business towards a healthy and growing Joseph Bank.”

Management says it does not believe that Jos. A. Bank customers shifted to the Men’s Wearhouse stores but cited JCPenney (JCP) and Kohl’s (NYSE:KSS) as overlapping competitors. An analyst asked if the company would consider selling Joseph A. Bank given the poor results. Management says it remains committed to making the merger work and recognizes that both the Men’s Wearhouse and Jos. A. Bank are promotional brands. They need to determine the right promotional message for Jos. A. Bank.

Summing it up

I owned shares of Jos. A. Bank before it was acquired. That made me curious about its current circumstances. Investors can take away a couple of lessons.

First, the current demographic that shops at Jos. A. Bank and JCPenney demands discounts. In 2013, JCPenney’s former CEO Ron Johnson was fired after sales plummeted when he attempted to eliminate discounts and implement a “fair and square” pricing strategy.

Second, most acquisitions do not benefit shareholders. Men’s Wearhouse’s purchase of Jos. A Bank is a prime example of value destruction. The company paid $1.8 billion for Jos. A. Bank. It projected $100 million to $150 million in combined cost reduction and sales growth synergies when it made the acquisition. Instead, it is now projecting cost reduction synergies of $75 million for 2016 and are looking at a 35% fourth quarter sales decline at Jos. A. Bank based on recent foot traffic. Men's Wearhouse’s market capitalization today is $738 million which is 41% of the price they paid for Jos. A. Bank.

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