2013 | 2014 | ||||||
Price: | 52.00 | EPS | $2.51 | $2.78 | |||
Shares Out. (in M): | 48 | P/E | 20.7x | 18.7x | |||
Market Cap (in $M): | 2,500 | P/FCF | 20.0x | 18.7x | |||
Net Debt (in $M): | 0 | EBIT | 191 | 203 | |||
TEV (in $M): | 2,500 | TEV/EBIT | 13.1x | 12.3x |
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If MW acquires JOSB and can execute on its internal plan, the company should generate EPS of $8.00 within three years. Applying a forward P/E of 13x will result in the stock doubling from current levels.
While both MW and JOSB have publicly recognized the merit of a combination, there remains some risk to the existing proposal from MW to acquire JOSB and it is likely that this process will have a few more twists and turns before a transaction is ultimately consummated. However, given the absence of any other material acquisition target within the mid-market menswear retail space, a deal seems inevitable.
MW (Street EPS $2.51)
The street expects MW to report EPS of $2.51 for the fiscal year ending January 2014. This is $0.01 ahead of guidance of $2.40-2.50 which was reiterated the second week of December. Unlike most retailers, MW actually loses money in Q4 but given the timing of when management provided guidance, Q4 EPS should not be much worse than current expectations of a loss of ($0.07). Therefore, expectations for full-year EPS of $2.51 seem acheivable.
JOSB ACQUSITION ($2.51 + $0.48 = $2.99)
In November, MW offered $55 for JOSB. While the bid may have to be increased slightly given that JOSB is currently trading at $57, it should still remain nicely accretive to MW. As a beneficial side effect, JOSB’s exposure to cold-weather apparel helps the company generate peak quarterly income in Q4, which will help offset MW’s seasonally weak Q4, and allow a combined company to generate much more level quarterly results.
MW Price |
$52.01 |
|
JOSB 01/14E Sales |
1,046 |
(x) Shares |
48 |
|
(x) Margin |
13.9% |
Market Value |
2,500 |
|
JOSB 01/14E EBITDA |
145 |
(-) Cash |
(65) |
|
(-) D&A |
(30) |
(-) Q4 2013 FCF |
(48) |
|
(-) Interest @ 6.5% |
(78) |
(+) Debt |
100 |
|
(-) Taxes @ 38% |
(14) |
(+) Minority Interest |
13 |
|
Income |
23 |
(+) JOSB Acquisition |
1,200 |
|
(/) MW Shares |
48 |
Enterprise Value |
3,700 |
|
Incremental EPS |
$0.48 |
A few of the assumptions made above could change as the deal progresses but it appears reasonable to assume that the acquisition of JOSB will increase MW’s EPS by about $0.48.
JOSB SYNERGIES ($2.99 + 1.64 = $4.63)
The main attraction of a deal is the substantial amount of potential synergies that can be generated from combining the two businesses. MW’s largest shareholder, Eminence Capital, released a presentation on November 20th which breaks these down into their respective components. Eminence also outlined numerous potential revenue synergies within e-Commerce, tuxedoes, and brands that could generate between $175-390MM in incremental sales.
Driver |
|
EBIT |
Procurement |
|
20-35 |
Logistics |
|
15-25 |
Marketing |
|
20-30 |
G&A |
|
20-35 |
Impact |
|
75-125 |
On November 26th, MW put out its own presentation highlighting synergies of $100-150MM which could be realized over three years. Assuming zero revenue synergies and taking the high-end of Eminence's range but the midpoint of MW’s range for expected cost synergies results in an incremental EPS of $1.64.
MW GROWTH ($4.63 + 2.14 = $6.77)
While estimates are limited, the street expects MW to add roughly $0.25 a year in annual EPS through new store growth and modest comp increases. By itself, this would result in an additional $0.75 of EPS over the next three years. However, as investor focus has turned to the JOSB deal, a vital piece of information was released that implies substantially higher earnings power.
Well before a deal with JOSB materialized, a number of changes were occurring at MW. In December of last year, the company hired designer Joseph Abboud as Chief Creative Director. Then in March of this year, the company announced a substantial $200MM buyback. In July, the company acquired the Joseph Abboud brand for $98MM. The brand had a substantial amount of retail business with a number of department stores though MW is now exiting this wholesale business in order to fold it back into MW’s own stores. Few details were provided to investors about the financial impact management expected this acquisition to have on MW’s business. Curiously, less than a week after the acquisition was announced, MW announced that it was accelerating its buyback program by repurchasing $100MM prior to the end of Q4.
While investors may have been kept in the dark about the long-term upside from the acquisition as long as management was able to repurchase stock at favorable prices, this came to an abrupt end in October when JOSB launched a $48/share offer for MW. The offer was immediately turned down without any dialogue, leaving many investors scratching their heads as to what MW’s board was seeing that the public markets could not. Then in October, MW put out a presentation defending its existence as a stand-alone entity and encouraging investors to not support a deal. As part of that presentation, MW’s management outlined a three-year plan to take the company to $5/share in EPS while generating over $10/share in FCF. The plan consisted of three key components: 4-5% comps (majority from swapping in-house brands for higher-priced Abboud), $90-120MM in incremental Abboud sales, and 45-50 new stores per year (30 MW and 15-20 Outlet).
In an 8-k filing yesterday, Men’s Wearhouse (MW) provided an investor update of the Company’s growth initiatives and earnings potential that support its rationale for remaining independent. The presentation did not include any bold new moves, but represented a more detailed view of the Company’s existing strategy, especially the Joseph Abboud (JA) acquisition. Based on our analysis, the Company has earnings power of $5+ by 2016, with JA being the main contributor to upside versus our previous estimates…Management’s assumptions seem reasonable, though subject to economic sensitivity and execution. Management is implying that EPS can double over the next three years, which will follow a three-year period of flattish EPS. – Johnson Rice 10/29/13
Driver |
Revenue |
EBIT |
Income |
EPS |
4-5% Comps |
130-170 |
45-55 |
28-35 |
$0.59-0.72 |
Abboud |
90-120 |
45-55 |
28-35 |
$0.59-0.72 |
New Stores |
210-230 |
50-55 |
32-35 |
$0.66-0.72 |
Corporate Apparel |
20-30 |
10-12 |
6-8 |
$0.13-0.16 |
SG&A Leverage |
- |
13-15 |
8-9 |
$0.17-0.20 |
2016 Impact |
450-550 |
163-192 |
103-121 |
$2.14-2.52 |
While MW’s Abboud strategy is being temporarily overshadowed by the JOSB deal, it remains a credible long-term strategy that is likely to be executed on over the next few years. These numbers were provided in defense of not being acquired by JOSB, so there may have been an incentive to be optimistic but that said, management will be hard pressed to back away from them once a JOSB deal is completed. Using the low-end of the range implies an incremental EPS of $2.14.
JOSB GROWTH ($6.77 + $0.59 = $7.36)
JOSB LTM EBITDA of $133MM is about a 13% margin, which compares to the 16-19% margins generated by the company from fiscal 2006-2012. The street expects fiscal 2015 sales of $1.1B. Assuming that the company takes three years to get here instead of one while margins slowly recover to 16%, JOSB will eventually generate EBITDA of $178MM. To MW, this incremental $45MM would add $0.59 in EPS.
CAPITAL ALLOCATION ($7.36 + $0.64 = $8.00)
MW management’s presentation noted that while the combined company’s initial focus would be on paying down debt, it also emphasized that management would reinstate a share repurchase policy as soon as practicable. Given the consistency of a combined company’s quarterly earnings along with MW’s prior track record for repurchasing stock, it is unlikely that the company returns to an underlevered balance sheet. Rather, it seems reasonable to assume that MW’s management would elect to maintain approximately $1B of debt which would equate to 1.7x 2016 and 1.3x 2017 EBITDA. The table below assumes that after debt is paid down to this level, any additional FCF is used to repurchase stock at $78/share in fiscal 2016 and $89/share in fiscal 2017.
|
01/2015 |
01/2016 |
01/2017 |
Starting EBIT |
283 |
348 |
473 |
(+) Synergies |
25 |
50 |
50 |
(+) MW Growth |
30 |
60 |
90 |
(+) JOSB Growth |
10 |
15 |
20 |
Ending EBIT |
348 |
473 |
633 |
(-) Interest |
(78) |
(67) |
(65) |
EBT |
270 |
406 |
568 |
(-) Tax @ 37% |
(100) |
(150) |
(210) |
Income |
170 |
256 |
358 |
(/) Average Shares |
48 |
47 |
45 |
EPS |
$3.54 |
$5.50 |
$8.00 |
EXHIBITS
Nordstrom Tablet Plan for Abboud
http://www.essentialhommemag.com/joseph-abboud-and-nordstrom-bring-made-to-measure-to-the-ipad/
Abboud Reunited with Brand
http://video.foxbusiness.com/v/2586512883001/abboud-landscape-between-wholesale-and-retail-changing/
MW Presentation Against Acquisition
http://ir.menswearhouse.com/all-sec-filings/content/0001104659-13-078164/0001104659-13-078164.pdf
Eminence Presentation
http://ir.menswearhouse.com/all-sec-filings/content/0001193125-13-447642/0001193125-13-447642.pdf
MW Presentation Supporting Acquisition
http://content.stockpr.com/menswearhouse/media/9b3a03e220fdc8d5f1a6bf15e200b0e6.pdf
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