Men’s Wearhouse, Jos. A. Bank May Not Be a Good Fit

by Jonathan Berr | November 26, 2013 5:10 pm

Apparel retailers Men’s Wearhouse (MW[1]) and Jos. A Bank (JOSB[2]) are back at it again — this time, with the roles reversed.

After rejecting advances from Jos. A Bank, Men’s Wearhouse has countered with a $55 per share offer for its rival suit retailer. But neither JOSB nor MW will be entering into a merger from a position of strength, and that alone is enough reason for investors to stay away from both stocks … with or without a deal.

During the second quarter, sales at existing Men’s Wearhouse stores gained 0.7%, which was below the company’s internal expectations[3]. Though its flagship chain posted a 1.2% gain in the key retail metric, the company’s Canadian business Moore’s reported a 5.8% decline while its K&G discount stores saw business drop off 5%.

Moore’s and K&G have been struggling for a while. In fact, founder George Zimmer was ousted as chairman earlier this year amidst a dispute with his fellow board members over the company’s plans to sell K&G. Zimmer, who also was the company’s pitchman, wanted to retain K&G.

The picture is even more depressing at Jos. A Bank[4]: Comparable store sales plunged a whopping 15.9% in the second quarter[5], and third-quarter sales are “roughly flat” compared to a year ago. It plans to release a full earnings report Dec. 5.

Shares of Men’s Wearhouse surged more than 11% on the news of its JOSB buyout plans, and last changed hands at $56.29. Men’s Wearhouse’s $1.5 billion takeover of its smaller rival makes far more sense than Jos A. Bank’s plan to buy acquire Men’s Wearhouse, which the larger wisely rejected.

The market, though, seems to have gotten ahead of itself.

The road ahead for the two companies is tough, even under the most optimistic of scenarios. Many economists are expecting this holiday season to be the worst in years. Apparel retailing also is cutthroat in the best of times.

Many of MW’s and JOSB’s rivals have gone out of business because of the ferocious nature of the industry. Today’s Man, for instance, called it quits in 2003 after it couldn’t emerge from bankruptcy. Syms, which was well-known in the Northeast, is in the process of liquidating its stores because of what the company called “challenging economic conditions.”[6]

Among the first things that MW and JOSB will probably if a deal occurs is unload K&G and perhaps Moore since both chains have been underperforming for a while. Men’s Wearhouse has 1,137 stores while Jos. A Bank has 629 locations, so it would also make sense for the companies to shutter poorly performing stores. Otherwise, it’s hard to see how they would achieve the $100 million to $150 million in annual savings they expect the deal to generate.

Combined, the two companies would create the fourth-largest U.S. men’s apparel retailer with estimated sales of $3.5 billion. The combined company, though, lags rivals such as Kohl’s (KSS[7]), which is forecast by analysts to have sales of $6.14 billion. Revenue at another competitor, Macy’s (M[8]), is expected to top $9 billion.

Another issue is Zimmer. Though he doesn’t own enough MW stock to block the deal on his own, having him on board as a brand ambassador would do world of good for the companies as they try to win over consumers. Whether their corporate cultures will mesh is hard to say.

Jos. A Bank’s aggressive promotions are legendary, chock full of deals that seem to good to be true, such as “buy one suit get three for free.” The company is currently offering pre-Black Friday doorbusters such as cashmere blazers that regularly sell for $650, discounted to less $200[9]. Unfortunately, as JOSB noted during its last earnings release, “Customers did not respond as well to some of our highly promotional marketing campaigns as they did in the prior year.”

To be fair, Men’s Wearhouse is no slouch when it comes to promotions either. According to Kantar Media,[10] it spent $43.9 million in advertising in 2012, most of which went for television commercials in which Zimmer “guaranteed” that customers would like the way that they looked. The company, though, is more circumspect when it comes to advertising than JOSB. CEO Douglas Ewert told analysts during the last conference call[11] that “we don’t believe an aggressive increase in our marketing spend would give us a payoff.”

Combining MW and JOSB makes sense in theory. Whether the deal will pay off in the long-term is far less certain, which is why investors should take a pass on both stocks for now.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.

  1. MW:
  2. JOSB:
  3. below the company’s internal expectations:
  4. Jos. A Bank:
  5. second quarter:
  6. “challenging economic conditions.”:
  7. KSS:
  8. M:
  9. discounted to less $200:
  10. Kantar Media,:
  11. last conference call:

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