Men's Wearhouse MW S
June 09, 2015 - 10:53pm EST by
Reaper666
2015 2016
Price: 58.47 EPS 2.14 2.55
Shares Out. (in M): 48 P/E 0 0
Market Cap (in $M): 2,815 P/FCF 0 0
Net Debt (in $M): 1,625 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0
Borrow Cost: General Collateral

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  • Retail
  • Men's fashion
  • Merger
  • Competitive Threats

Description

Investors view Men’s Wearhouse (MW) as a category killer with an excellent business model driven by
the combination of a menswear store with tuxedo rentals. Investors are also betting on continued
resurgence of suits and further upside with revenue synergies. I believe that MW is encountering a
major threat from online tuxedo rental upstarts, will likely encounter problems with the integration of
Jos A. Bank, and is still in the middle of a long-term down trend in Menswear.
 
How MW works:
MW executes extremely well. The sales staff is attentive and friendly but does not pester. The company
is not promotional but rather brand-oriented. I would say from the 90s till the mid-2000s, MW
benefited primarily from the shrinking of department store menswear departments and the closing of
many regional chains. I would point out that I cannot think of one successful retailer that has been
successful after its competition went away due to a fall in demand.
More recently, MW has found a new way to prosper by adding tuxedo rental into the stores. Tuxedo
rentals are extremely high margin. The gross margin is over 80%, and even with incremental SG&A, the
contribution is 60%. Margins on tuxedo rental equate roughly to the entire operating income of the
firm. It is also a primary source of customer acquisition. I believe it is responsible for over 15% of MW’s
new customers every year and over 7% of new sales. MW’s national footprint gives it a large
competitive advantage over local and regional competition. A typical groom will likely have a member
of his wedding party in another location, or the wedding could very well be far from his current home.
The solution was MW, which allows coordination of the same tuxedo across multiple sites across the
nation.
Of course, the obvious solution to this is online sales. However, the logistics of such a process is
extremely difficult. You need to have several styles and colors in a range of sizes. To get a discount, you
must purchase in the thousands of dollars. So there is some initial scale required, which is the easiest
part. Think about the logistical nightmare of sending out different variations of tuxedo combinations
and then tracking them as they come back, making sure you know which one was ripped, who ripped it,
and when. Of course, there is the problem of being fit for a tuxedo. For years, MW saw this as too big a
hurdle to surmount, and they were right, as little, if any, inline sales materialized. But ecommerce
knowledge has greatly increased, and now some companies have started up and entered the space. The
fitting problem has been overcome by a choice of algorithms (by entering height and clothes sizes),
measuring yourself (which of course they have a tutorial for) or referrals to tailors who measure people
for free or one may already know your measurements from a previous fitting. The bar of the current
rental tuxedos is fairly low, and these appear to be far superior, though that is admittedly subjective.
The early results show incredible promise, and it appears these companies are executing as planned.
The largest by far is theblacktux.com. The company has already received venture funding from name
brand VC firms, has shown incredible growth, and even has a wait list for a rental.
 
 
Exhibit 1: Growth of Online Upstarts (Monthy Unique Visitors)
  Theblacktux Menguin Nationaltuxedorental.com Tuxship Simpletux Total MW Ratio of Online to MW
April-14 2,759 3,174   3,469 676 10,078 319 31.6
May-14 21,113 472 392 4,843 295 27,115    
June-14 7,986 431 1,317 2,016 317 12,067 1,294 9.3
July-14 13,450 2,039 276 2,589 979 19,333 2,548 7.6
August-14 15,976 1,127 2,004 1,774 1,171 22,052 137 161.0
September-14 20,186 1,245 1,098 2,481 626 25,636 1,140 22.5
October-14 24,309 4,001 2,241 2,877 1,543 34,971 1,171 29.9
November-14 16,530 2,427 4,834 1,929 1,641 27,361 1,017 26.9
December-14 24,525 4,165 3,471 513 1,778 34,452 112 307.6
January-15 43,876 6,667 757 914 2,349 54,563 1,387 39.3
February-15 52,012 13,668   7,892 8,630 82,202 235 349.8
March-15 76,571 17,337   3,676 2,186 99,770 1,286 77.6
April-15 91,220 12,801   2,198 3,513 109,732 8,950 12.3
Source: Compete.com              

 
 
As we can see from Exhibit 1 above, the new entrants are still relatively small. My best guess is the
current penetration is around 1%. However, the growth is simply phenomenal: over 10x YoY in April. A
quick check of Google shows that these companies do not appear to be buying this growth, and
amazingly, they are not undercutting MW on price as of yet. The start-ups compete on better style,
eliminating likely three trips to the store (sizing, pickup and drop-off). The huge growth appears to all be
viral. This makes sense as today’s groomsman is tomorrow’s groom, and even younger, today’s prom
goer is tomorrow’s formal attender. Social media, of course, is their friend. Additionally, the
demographics of tuxedo rental customers is essentially the internet generation, which should naturally
lead to high penetration.
The effect of lost tuxedo rental sales over time should be devastating for MW. I estimate that over the
next 10 years, 20% of the tuxedo market will go online and that MW will lose 25% of unit sales. Further,
retail product sales will suffer due to the lack of customer acquisition from tuxedo rental. I believe this is
extremely conservative. I assume that retail product will grow at 2% (in-line with inflation) with a decline
of 20 basis points each year from lower customer acquisition.
 
Valuation:
I assume that costs grow at just 2% minus expected synergies of 104 mln and any lowered SG&A from
tuxedo rental. I am furtherly generous in assuming that LIBOR stays at just 0.50% for the next 10 years.
The company does not buyback shares (instead pays a one-time dividend) at what would be inflated
prices, refinances with lower yielding debt, faces no recession over the next ten years, meets cost
synergies, maintains sales at Jos. A Bank, and the store count says flat. After all this, investors can expect
to get a company that earns $1.84 per share in FY2025 and $20.50 in cumulative dividends over the 10
year period. Therefore investors will likely be down over a 10 year period. The discounted value (very
low 6% rate) is $25.34 per share. For a price target, I assume an even more generous $35.00 or 12x
FY2018 EPS.
 
 

Potential Integration Problems:
MW closed on the acquisition of Jos A Bank (Bank) on June 18, 2014. The company has announced over
$100 mln in cost synergies with another $50 mln of revenue synergies. First a little background on the
deal. Bank actually offered to buy the larger MW first before, and MW eventually purchased Bank. It
appears to us that MW may have never really wanted to buy Bank but had its hand forced by the offer
and Bank’s move into the Tuxedo rental business. Bank was a notoriously promotional business, with
commercials offering Buy One, Get Two and even sometimes Three suits free. The campaign was even
lampooned on Saturday Night Live http://www.nbc.com/saturday-night-live/video/jos-a-bank-cleaning-
product/2768588, comparing the suits price to paper towels. MW is not promotional, and they have
been cutting discounting at Bank since the acquisition. Of course, a retailer eliminating discounts has
never faired too well and has never been a blueprint for success, with JC Penney (a painful experience
for the author) being the most primary example. Investors expect sales to rebound with easier comps,
but if you look at the results so far, things could be getting worse, not better.
 
Exhibit 2: Same Store Sales Showing Disturbing Trend
  2013 2014
  1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
Men's Warehouse 1.6% 0.7% 2.6% -2.5% 2.9% 4.4% 2.2% 6.8%
Joseph A Bank   -15.5% 2.4% 1.8%   1.0% -8.1% -6.6%
MW - Joseph Bank 1.6% 16.2% 0.2% -4.3% 2.9% 3.4% 10.3% 13.4%
 
 
Bank, as you would expect, has had weak sales since the acquisition (highlighted in Exhibit 2 above), but
it appears, based on headline numbers, to be slowly improving. However, by analyzing further, we can
see that the delta between MW and Bank stores has gotten worse every quarter. Therefore, it is likely
that Bank was just benefiting from a very good quarter in suit sales industry wide but is losing market
share and at an increasingly rapid pace. The lost sales are unlikely to be picked up by other MW stores,
since there is only a roughly 20% overlap in customers.
I do believe that MW will fully execute on the $100 mln of cost synergies, with possibly some small
upside. I am extremely skeptical that the company will get much, if any, of the projected $50 mln in
revenue synergies. These are largely from things like more slim-fit suits and increasing Big & Tall sizes,
which basically assumes that Bank, a fairly well-run store, was too stupid to sell these products to begin
with. The one area where there could be some upside is increasing tuxedo rentals at Bank, but that will
likely cannibalize MW.
 
Long-term Downward Trend in Suit Sales and Newer Competitors:
Data on suit sales is tough to get, but it does seem like the industry is picking back up as millennials
appear to enjoy occasionally getting dressed up. This compares to the roughly 100-year trend towards
more casual dress. I believe that the recent surge in men’s suits will just be a blip on its long-term
decline. If the trend towards more suits just showw more staying power, it is not fully clear that MW will
be able to fully participate. There seems to be a new much hipper wave of online upstarts like
Jackthreads looking to outfit more style-oriented millennials. The competition is not limited to online, as
Suit Supply, a very fashion forward chain in Europe, is rapidly expanding into the U.S. with 13 stores
currently and 5 opening soon. These are still small compared to MW, but if menswear continues to grow,
I believe competition will grow with it.  MW is like Icarus, fly to close to the sun and you will get burned; too close to the ground and be swallowed by the water.  Either way, MW appears to be headed for trouble.
 
 
  grow, I believe competition will grow with it. MW is like Icarus, fly to close to the sun and you will getgrow, I believe competition will grow with it.  MW is like Icarus, fly to close to the sun and you will get burned; too close to the ground and be swallowed by the water.  Either way, MW appears to be headed for trouble.
 
Betting against an easy opponent:
The best person to fight against is the one who will not hit back. MW is at the point of saturation in an
investment presentation the company cites Alaska as a potential growth market, so our short thesis is
unlikely to be overrun by unit growth. After the acquisition, the company will be focused on paying
down debt, which yields only Libor + 3.25%. I see no natural acquisition candidates for MW, unless the
company makes the very risky move of going overseas. While we believe MW has very good and
capable management, there appears to be no levers left to pull.
 
Risks:
Better than expected synergies.
Continued rise in suit sales.
Online tuxedo rental business does not take off.
 
 
 
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Integration problems.

Growth of online tuxedo rental competitors.

 

Slow-down in suit sales.

    sort by    

    Description

    Investors view Men’s Wearhouse (MW) as a category killer with an excellent business model driven by
    the combination of a menswear store with tuxedo rentals. Investors are also betting on continued
    resurgence of suits and further upside with revenue synergies. I believe that MW is encountering a
    major threat from online tuxedo rental upstarts, will likely encounter problems with the integration of
    Jos A. Bank, and is still in the middle of a long-term down trend in Menswear.
     
    How MW works:
    MW executes extremely well. The sales staff is attentive and friendly but does not pester. The company
    is not promotional but rather brand-oriented. I would say from the 90s till the mid-2000s, MW
    benefited primarily from the shrinking of department store menswear departments and the closing of
    many regional chains. I would point out that I cannot think of one successful retailer that has been
    successful after its competition went away due to a fall in demand.
    More recently, MW has found a new way to prosper by adding tuxedo rental into the stores. Tuxedo
    rentals are extremely high margin. The gross margin is over 80%, and even with incremental SG&A, the
    contribution is 60%. Margins on tuxedo rental equate roughly to the entire operating income of the
    firm. It is also a primary source of customer acquisition. I believe it is responsible for over 15% of MW’s
    new customers every year and over 7% of new sales. MW’s national footprint gives it a large
    competitive advantage over local and regional competition. A typical groom will likely have a member
    of his wedding party in another location, or the wedding could very well be far from his current home.
    The solution was MW, which allows coordination of the same tuxedo across multiple sites across the
    nation.
    Of course, the obvious solution to this is online sales. However, the logistics of such a process is
    extremely difficult. You need to have several styles and colors in a range of sizes. To get a discount, you
    must purchase in the thousands of dollars. So there is some initial scale required, which is the easiest
    part. Think about the logistical nightmare of sending out different variations of tuxedo combinations
    and then tracking them as they come back, making sure you know which one was ripped, who ripped it,
    and when. Of course, there is the problem of being fit for a tuxedo. For years, MW saw this as too big a
    hurdle to surmount, and they were right, as little, if any, inline sales materialized. But ecommerce
    knowledge has greatly increased, and now some companies have started up and entered the space. The
    fitting problem has been overcome by a choice of algorithms (by entering height and clothes sizes),
    measuring yourself (which of course they have a tutorial for) or referrals to tailors who measure people
    for free or one may already know your measurements from a previous fitting. The bar of the current
    rental tuxedos is fairly low, and these appear to be far superior, though that is admittedly subjective.
    The early results show incredible promise, and it appears these companies are executing as planned.
    The largest by far is theblacktux.com. The company has already received venture funding from name
    brand VC firms, has shown incredible growth, and even has a wait list for a rental.
     
     
    Exhibit 1: Growth of Online Upstarts (Monthy Unique Visitors)
      Theblacktux Menguin Nationaltuxedorental.com Tuxship Simpletux Total MW Ratio of Online to MW
    April-14 2,759 3,174   3,469 676 10,078 319 31.6
    May-14 21,113 472 392 4,843 295 27,115    
    June-14 7,986 431 1,317 2,016 317 12,067 1,294 9.3
    July-14 13,450 2,039 276 2,589 979 19,333 2,548 7.6
    August-14 15,976 1,127 2,004 1,774 1,171 22,052 137 161.0
    September-14 20,186 1,245 1,098 2,481 626 25,636 1,140 22.5
    October-14 24,309 4,001 2,241 2,877 1,543 34,971 1,171 29.9
    November-14 16,530 2,427 4,834 1,929 1,641 27,361 1,017 26.9
    December-14 24,525 4,165 3,471 513 1,778 34,452 112 307.6
    January-15 43,876 6,667 757 914 2,349 54,563 1,387 39.3
    February-15 52,012 13,668   7,892 8,630 82,202 235 349.8
    March-15 76,571 17,337   3,676 2,186 99,770 1,286 77.6
    April-15 91,220 12,801   2,198 3,513 109,732 8,950 12.3
    Source: Compete.com              

     
     
    As we can see from Exhibit 1 above, the new entrants are still relatively small. My best guess is the
    current penetration is around 1%. However, the growth is simply phenomenal: over 10x YoY in April. A
    quick check of Google shows that these companies do not appear to be buying this growth, and
    amazingly, they are not undercutting MW on price as of yet. The start-ups compete on better style,
    eliminating likely three trips to the store (sizing, pickup and drop-off). The huge growth appears to all be
    viral. This makes sense as today’s groomsman is tomorrow’s groom, and even younger, today’s prom
    goer is tomorrow’s formal attender. Social media, of course, is their friend. Additionally, the
    demographics of tuxedo rental customers is essentially the internet generation, which should naturally
    lead to high penetration.
    The effect of lost tuxedo rental sales over time should be devastating for MW. I estimate that over the
    next 10 years, 20% of the tuxedo market will go online and that MW will lose 25% of unit sales. Further,
    retail product sales will suffer due to the lack of customer acquisition from tuxedo rental. I believe this is
    extremely conservative. I assume that retail product will grow at 2% (in-line with inflation) with a decline
    of 20 basis points each year from lower customer acquisition.
     
    Valuation:
    I assume that costs grow at just 2% minus expected synergies of 104 mln and any lowered SG&A from
    tuxedo rental. I am furtherly generous in assuming that LIBOR stays at just 0.50% for the next 10 years.
    The company does not buyback shares (instead pays a one-time dividend) at what would be inflated
    prices, refinances with lower yielding debt, faces no recession over the next ten years, meets cost
    synergies, maintains sales at Jos. A Bank, and the store count says flat. After all this, investors can expect
    to get a company that earns $1.84 per share in FY2025 and $20.50 in cumulative dividends over the 10
    year period. Therefore investors will likely be down over a 10 year period. The discounted value (very
    low 6% rate) is $25.34 per share. For a price target, I assume an even more generous $35.00 or 12x
    FY2018 EPS.
     
     

    Potential Integration Problems:
    MW closed on the acquisition of Jos A Bank (Bank) on June 18, 2014. The company has announced over
    $100 mln in cost synergies with another $50 mln of revenue synergies. First a little background on the
    deal. Bank actually offered to buy the larger MW first before, and MW eventually purchased Bank. It
    appears to us that MW may have never really wanted to buy Bank but had its hand forced by the offer
    and Bank’s move into the Tuxedo rental business. Bank was a notoriously promotional business, with
    commercials offering Buy One, Get Two and even sometimes Three suits free. The campaign was even
    lampooned on Saturday Night Live http://www.nbc.com/saturday-night-live/video/jos-a-bank-cleaning-
    product/2768588, comparing the suits price to paper towels. MW is not promotional, and they have
    been cutting discounting at Bank since the acquisition. Of course, a retailer eliminating discounts has
    never faired too well and has never been a blueprint for success, with JC Penney (a painful experience
    for the author) being the most primary example. Investors expect sales to rebound with easier comps,
    but if you look at the results so far, things could be getting worse, not better.
     
    Exhibit 2: Same Store Sales Showing Disturbing Trend
      2013 2014
      1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
    Men's Warehouse 1.6% 0.7% 2.6% -2.5% 2.9% 4.4% 2.2% 6.8%
    Joseph A Bank   -15.5% 2.4% 1.8%   1.0% -8.1% -6.6%
    MW - Joseph Bank 1.6% 16.2% 0.2% -4.3% 2.9% 3.4% 10.3% 13.4%
     
     
    Bank, as you would expect, has had weak sales since the acquisition (highlighted in Exhibit 2 above), but
    it appears, based on headline numbers, to be slowly improving. However, by analyzing further, we can
    see that the delta between MW and Bank stores has gotten worse every quarter. Therefore, it is likely
    that Bank was just benefiting from a very good quarter in suit sales industry wide but is losing market
    share and at an increasingly rapid pace. The lost sales are unlikely to be picked up by other MW stores,
    since there is only a roughly 20% overlap in customers.
    I do believe that MW will fully execute on the $100 mln of cost synergies, with possibly some small
    upside. I am extremely skeptical that the company will get much, if any, of the projected $50 mln in
    revenue synergies. These are largely from things like more slim-fit suits and increasing Big & Tall sizes,
    which basically assumes that Bank, a fairly well-run store, was too stupid to sell these products to begin
    with. The one area where there could be some upside is increasing tuxedo rentals at Bank, but that will
    likely cannibalize MW.
     
    Long-term Downward Trend in Suit Sales and Newer Competitors:
    Data on suit sales is tough to get, but it does seem like the industry is picking back up as millennials
    appear to enjoy occasionally getting dressed up. This compares to the roughly 100-year trend towards
    more casual dress. I believe that the recent surge in men’s suits will just be a blip on its long-term
    decline. If the trend towards more suits just showw more staying power, it is not fully clear that MW will
    be able to fully participate. There seems to be a new much hipper wave of online upstarts like
    Jackthreads looking to outfit more style-oriented millennials. The competition is not limited to online, as
    Suit Supply, a very fashion forward chain in Europe, is rapidly expanding into the U.S. with 13 stores
    currently and 5 opening soon. These are still small compared to MW, but if menswear continues to grow,
    I believe competition will grow with it.  MW is like Icarus, fly to close to the sun and you will get burned; too close to the ground and be swallowed by the water.  Either way, MW appears to be headed for trouble.
     
     
      grow, I believe competition will grow with it. MW is like Icarus, fly to close to the sun and you will getgrow, I believe competition will grow with it.  MW is like Icarus, fly to close to the sun and you will get burned; too close to the ground and be swallowed by the water.  Either way, MW appears to be headed for trouble.
     
    Betting against an easy opponent:
    The best person to fight against is the one who will not hit back. MW is at the point of saturation in an
    investment presentation the company cites Alaska as a potential growth market, so our short thesis is
    unlikely to be overrun by unit growth. After the acquisition, the company will be focused on paying
    down debt, which yields only Libor + 3.25%. I see no natural acquisition candidates for MW, unless the
    company makes the very risky move of going overseas. While we believe MW has very good and
    capable management, there appears to be no levers left to pull.
     
    Risks:
    Better than expected synergies.
    Continued rise in suit sales.
    Online tuxedo rental business does not take off.
     
     
     
     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise do not hold a material investment in the issuer's securities.

    Catalyst

    Integration problems.

    Growth of online tuxedo rental competitors.

     

    Slow-down in suit sales.

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