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Bram de Haas
Bram de Haas
Articles (390)  | Author's Website |

Michael Burry Scores Pyrrhic Victory

Tailored Brands amends capital allocation policy and scraps dividend in favor of buybacks and debt reduction

September 12, 2019 | About:

Michael Burry is upping his activism. After engaging with GameStop (GME), the "Big Short" guru also sent a letter to the board of directors of Tailored Brands Inc. (TLRD) and on Sept. 2, he doubled down on his campaign against the company by filing a 13-D and increasing his position. I reviewed his campaign here.

Yesterday, the company reported earnings and gave in to Burry’s key requests. Interestingly, the stock crashed nearly 26% in after-hours trading. I'm not sure how pleased Burry is about his victory in the short term.

The board updated its capital allocation policy:

"After extensive review, the Board of Directors approved an update to the Company’s capital allocation policy. Effective in the fourth quarter, the Company’s quarterly cash dividend will be suspended and redeployed for accelerated debt repayment and share repurchases. This does not impact the previously approved quarterly cash dividend of $0.18 per share payable on September 27, 2019, to shareholders of record at the close of business on September 17, 2019.

Suspending the quarterly cash dividend of $0.18 per share is expected to make available approximately $36.5 million on an annualized basis. The Company has $48.0 million available for share repurchases under its previously authorized 2013 share repurchase program."

The company also slashed its dividend in favor of share repurchases and debt reduction. I never expected the board to give in to this demand. It is usually a tough step for a board to eliminate a dividend.

However, from a long-term shareholder’s perspective, who is highly certain the company has a long-term future (not necessarily a thriving one), it is the single best possible allocation of capital.

I expect a sizeable portion first goes to debt reduction because boards tend to be more easily convinced of the merits of that outlet. The company added some color on the earnings call:

Paul Trussell: "Thank you for that color. And maybe you can just spend a minute giving a bit more detail on the capital allocation decision made here, especially as it relates to the dividend decision and also help us understand what -- the decisions you're going to -- how you're going to decide to when to buy stock versus paying down debt. Thank you."

Jack Calandra: "Yeah. Hi, Paul. This is Jack. So as I mentioned in my prepared remarks and given where the stock prices and the dividend yield, we strongly believe that there's a more efficient way of deploying capital than through the dividend. Want to make it clear that funds freed up from the dividend, as you mentioned will be deployed into a mix of share repurchases and accelerated debt reduction. And also just to make clear that the funds that we received from the sale of corporate apparel will be entirely will be entirely applied to debt reduction.

In terms of how we will toggle between those two opportunities, you know, we'll consider a number of variables in deciding how to allocate funds between the two. I would say given our transformation strategies, the confidence we have in them and our assessment of their risk adjusted outcomes, we do believe that the stock is undervalued based on a DCF methodology and we will continue to look at where the stock is relative to those to that valuation, as well as where the bonds and the term loan are trading relative to one another to make that decision and it's a decision that we will obviously be revisiting frequently as we move through the months ahead."

Why did the stock drop 26%? Is the outlook so dour? I don't think so. Quarterly sales didn't vary as much as I expected before checking. The guidance is a bit below what is implied by analyst estimates. The company's outlook, however, does not include the improvements through the capital allocated toward debt reduction or share repurchases, while the analysts' models do. The company does not consider restructuring consultancy costs, but I hope this is a relatively small oversight.

"The Company’s outlook for the third quarter of fiscal 2019 is as follows:

Earnings per Share: The Company expects to achieve adjusted diluted EPS in the range of $0.40 to $0.45, excluding the impact of any share repurchases.

Comparable Sales: The Company expects comparable sales for:

Men’s Wearhouse to be down 3% to 5%

Jos. A. Bank to be down 2% to 4%

K&G to be down 2% to 4%

Moores to be down 4% to 6%.

Effective Tax Rate: The Company expects an effective tax rate of 23% to 24%.

Real Estate: The Company expects net closures of seven stores, across Men’s Wearhouse and Jos. A. Bank.

The Company’s outlook excludes expected costs for third party domain experts and other actions associated with its cost savings and operational excellence programs.

This means the company is trading at about 2.5x forward earnings before aggressive share repurchases are taken into account. The capitulation by the board also means they are open-minded and listening to outside investors. That’s a huge positive from the perspective of long-term shareholders. The company doesn’t need to grow. It is perfectly fine if revenue goes down. As long as EBITDA holds up and the share capital is shrunk decisively the stock should rebound strongly over the coming months."

The company’s outlook excludes expected costs for third-party domain experts and other actions associated with its cost-savings and operational excellence programs.

This means the company is trading about 2.5 times forward earnings before aggressive share repurchases are taken into account. The capitulation by the board also means they are open-minded and listening to outside investors. That’s a huge positive factor from the perspective of long-term shareholders. The company doesn’t need to grow. It is perfectly fine if revenue goes down. As long as Ebitda holds up and the share capital shrinks decisively, the stock should rebound strongly over the coming months.

Disclosure: No positions.

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About the author:

Bram de Haas
Bram de Haas is managing editor of The Special Situations Report and Founder of Starshot Capital B.V.

Visit Bram de Haas's Website


Rating: 4.0/5 (1 vote)

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Comments

Praveen Chawla
Praveen Chawla premium member - 1 month ago

Good article. Looks like they are doing the right thing. I am sceptical that on-line suit buying is going to take off.

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