Value Investors Club / TAILORED BRANDS INC (TLRD)

Description

as a short. Some major things have changed since then that now make this stock a great value.

For starters the stock has fallen over 90%. In addition on the business side, the company’s

tuxedo rental business has proven to be impervious to internet competition, and TLRD has

developed a custom suit business. We believe that TLRD has two business lines (the tux rental

and the custom suit) that have large competitive advantages and no real rivals in the space.

These business lines make up close to 30% and growing of core (exiting out K&G and corporate

apparel) gross profits and provide a core of profitability. This is a business that has had an

extremely steady history, operates in an internet resistant category and is fairly dominant in that

category. While many see long-term fashion risk (the death of the suit), we do not believe that

will come to fruition and see many trends to the contrary. Amazingly you can now buy TLRD for

just over 3X depressed earnings.

TLRD’s advantaged business lines:

Tuxedo Rental:

The core advantage of the tuxedo rental business is the nationwide distribution. If one is getting

married there is a good chance that members of the wedding party are in different parts of the

country. TLRD is the only option that can truly support this kind of rental in store nation-wide.

So a groom who picks out and rents in New York can have his best man get fitted and rent the

same type tux in Florida. We previously thought that online tux rental companies were making

inroads, but their product is actually as or more expensive than TLRD, and they can be difficult

to use with cameras and other fitting issues. While online has taken some share, it appears

limited to a niche of more fashion conscious users. TLRD’s recent decline in rental revenues

has been caused by a decrease in the category (less weddings and events opting to go black

tie).

TLRD’s failure when it tried to open up rental areas in Macy’s stores demonstrates the difficulty

of doing rental in a non-suit specialty store. Businesses that specialize in rentals suffer from the

seasonality of the business and the lack the brand awareness of TLRD. We doubt that a tux

rental chain could go national again (TLRD bought a specialty shop years ago) with TLRD now

firmly entrenched.

Custom Suits:

TLRD’s custom suit business now generates $250 mln in sales and growing for TLRD. You can

get a custom suit for less than $400 at Men’s Wearhouse vs. $1,200 at a local mom & pop. The

local specialty store simply can’t generate enough sales to get direct deals to keep the costs

down. But even Macy’s can’t compete as it lacks resources in two areas--tailors and

salespeople. A custom suit sale is a long and high touch sales process, and Macy’s lacks both

the number of sales people to handle this and the quality of salespeople. We spoke to a former

Macy’s exec who laid this out, but all you really have to do is walk into most Macy’s stores to

see this for yourself. It’s actually even worse because Macy’s does have some outstanding

salespeople who make a lot of commission, but they likely are going to prefer to service multiple

customers on a busy day to buy ready-to-wear suits rather than to take more time to get a

custom suit sold. Secondly department stores lacks the tailors. There is usually one in the

whole store, and many tailors split time between multiple stores so there is not a tailor in a lot of

stores at all times. Lastly, the company would have to advertise the product which takes away

from ads for other products. Macy’s does offer custom suits (starting at $600) through a leased

program in about 50 stores as well as another special order product available in a handful of

other stores, but the product has flopped for the reasons we outlined above. We think that to

fully add custom suits Macy’s would have to increase costs by $200 mln, so the added sales

would have to be roughly $400 mln+, which would likely equate to over $1 bln in sales at TLRD,

given the relative market share. The $200 mln would cover an increase of ½ tailor per shift,

roughly doubling the number per store or 650 (1 per store) at $60K+benefits per year. You

would then need to double the sales staff adding another two salespeople per store and

increase the comp above the current roughly $75K per person (to get better qualified people)

plus benefits, and that comes out to over $300K per store in 650 stores. There is also the

problem of finding this many tailors and qualified salesman, which may be impossible. While

Macy’s could do this gradually, rolling out in a small number of stores to start, it would be much

more likely to go to the opposite way with TLRD brands growing sales and forcing Macy’s to cut

its men’s department before Macy can fully respond.

While custom suits have grown dramatically for TLRD, it seems to have largely cannibalized

other sales. We think that may change going forward as the product becomes better known. If

this sales growth does not accelerate from custom suits, it still adds to the durability of the

business.

TLRD’s consistency of sales:

Note I have a table that just won't post, I encourage investors to just look their filings to see for yourself but comps really don't move much year to year and do not appear to be very sensitive to the economy.

We believe that the consistency of TLRD’s sales indicates the strength of the business. A 3%

downturn in comps is an extreme move for TLRD. We would note that what seems like a big

drop down during the crisis, was really a small drop exasperated by the big increase in

promotional activity from Joseph Banks (then separately owned), if adjusted for that, then we

believe that comps only slowed about 6% cumulatively between 2006 and 2009. We believe

that consistent sales are a mark of a strong retailer who is not that cyclical.

Suit Sales are Internet Resistant:

We also believe that suits are very internet resistant. While suits can and are being sold online,

the purchase is a fairly big ticket item and an infrequent purchase. Most people like to speak to

an expert on which style and need someone to work with them on fit. While online can use

apps to get a fit, this is a tough process for consumers to follow. The apps are not simple for all

to use, and a friend to help is recommended. The process involves holding the camera at

certain angles and positions. For those who are technically capable of this, they still have to

have the ability or confidence to selecttheir own suit, leaving a small subset of the population.

From what we heard from experts, the fit of online suits including custom are not as good as can

be done with a tailor in store, which is contrary to what these companies claim. We also see the

service of getting a suit and getting fitted as ritualistic and rare pampering that some men enjoy

over click and ship.

We do see online taking share over time, but it will likely remain small and still allow TLRD to

prosper for a very long time.

Will the suit continue to face secular decline?:

What has hurt TLRD recently is essentially category weakness as suit sales have been under

pressure. This has been an ongoing trend. The white collar world started to leave the suit

behind in the 90s, and now even the few remaining business casual holdouts like investment

banks and private equity shops have recently made the switch. For many or most industries a

suit isn’t even needed for interviews. Even most religious services on Sundays have gone from

suits to slacks. The good news is that this shift is in the past. These sales are gone, so what is

left? We believe that the suit has kept up in the special occasion market such as weddings,

charity events, and Bar Mitzvahs. We think that this market is here to stay. We base this on

several factors. First off people have always marked special occasions with special attire. At

one time there were more Tuxedos than there are today, but we see no form of attire able to

encroach on the suit. Secondly it appears that younger generation men, especially millennials

are more fashion conscious and have a bigger interest in dressing up. As they dress down for

work, some may use a sports coat or suit when not needed to accentuate their style. After a

few years of declines NPD has forecast suit sales to be up over the next few years.

TLRD has faced much bigger secular challenges than today. In the late 90s the move to casual

gained steam and suits were seemingly abandoned in mass. The Gap (check out the classic

commercial from 1998 https://www.youtube.com/watch?v=XJ735krOiPo) rode the casual wave

maybe better than anyone with a stock price more than double what it is 20 years later. Yet

despite this casual wave, back then Men’s Wearhouse had 9.6%, 7.7% and 3.3% comps in the

U.S. in 1998, 1999 and 2000. The company used a growing assortment of casual clothing to

increase sales as it is about to attempt to do again today. We actually think that what TLRD is

missing is good merchandising talent that it previously had with old management. It is not the

expertise of the current more tech focused management. Hopefully the next CEO can bring

more of this to the table. We would note that we have heard that Macy’s menswear department

has comped well, despite the pressure on suits sales. We see no reason why TLRD cannot do

the same.

Valuation:

TLRD is priced to move at just under 2.9X 2019 EPS and a double digit dividend yield. While

the company is modestly over levered (net debt just under 3.7X FY2020E EBITDA), restricting

buybacks that could change if earnings turn-around. We would remind investors that TLRD has

historically traded in the high teens to twenties multiples, with it being there as late as 2015. If

comps could stabilize or keep up with inflation and margins just return to what they were just

last year, it’s not hard to see TLRD earning $3.00 per share, repurchasing shares and trading

back to $40.00 per share. A rebound in margins not even up to peak levels, driven by the

continued growth of custom suits could see TLRD eclipse $4.00 in EPS and the upside to the

stock would be substantial.

Catalysts:

Management’s tech investments should start bearing fruit in the back half of the year. While we

are not expecting some killer app, we do see some incremental improvement, with the bar so

low, that is more than enough.

If JCP were to close, which could be fairly soon, we believe that it could result in $100 mln being

added to TLRD sales or a 3+% boost to comps. Of course store closures for JCP and/or

Macy’s would be positive for TLRD.

We believe that increased casual offering at TLRD should boost its sales as would any other

improvements in merchandising.

A sale of K&G and/or the Corporate Apparel division to TLRD are very possible. The sales

would likely be done at higher multiples than TLRD currently trades for, and they are lower

quality businesses than the remaining core.

TLRD’s short-term earnings are out on the 12th

The stock has been crushed recently so early credit card data is likely indicating a weak quarter. We actually see this as an opportunity for a

relief rally.

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

Sorry formatting problems see above.

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			2019	2020
Price:	5.56	EPS	1.90	2.15
Shares Out. (in M):	51	P/E	0	0
Market Cap (in $M):	281	P/FCF	0	0
Net Debt (in $M):	0	EBIT	0	0
TEV (in $M):	0	TEV/EBIT	0	0