Description

SITUATION OVERVIEW

In February 2016, I wrote up the Tailored Brands (f.k.a. Men’s Wearhouse) 7% Senior notes due 2022, which were then trading at 69 for a 15% yield (see here: Feb 2016 VIC Writeup).  I would encourage you to read that write-up for the detailed history.

At that time, credit spreads were hitting the widest levels in years, and TLRD was deep in the midst of botching its ill conceived acquisition of Jos A Banks (“JOSB”).  The company had $1.7bn of debt trading at distressed levels, and it was levered at >5x EBITDA, based on my conservative estimate of 2016 EBITDA at that time. Fast forward to today, and TLRD’s leverage is ~3.1x EBITDA.  Adj EBITDA for this year will be ~$370mm, +15% above the EBITDA level I was underwriting 2.5 years ago.  Most importantly, the Company has generated $570mm of cash flow and paid down $460mm of debt, much of which was retired below par.  However, TLRD’s market capitalization today is only $390mm above its level in February 2016. Put another way, TLRD’s current 6x EBITDA multiple and 16% FCF yield is a discount to its valuation in February 2016.

THESIS

In every way, TLRD is a better company with a better balance sheet, than it was in February 2016.  The Russell 2000 is +58% since then. However, TLRD’s valuation and its stock’s volatility continue to reflect its checkered past, as if the past 2.5 years didn’t happen.  Its most junior debt yields 6.1%, but its equity yields >16%. This is a glaring disconnect, which I have seen play out very well for the equity in other situations. This is a stable, growing, and highly cash generative business without the seasonality, fashion trends, or secular threats that are characteristics of most other apparel retailers.  Based on a more appropriate 7.5x 2019 EBITDA and 9% FCF yield, TLRD is worth $40/sh (+90% upside).  I believe TLRD’s continued operational execution, ongoing improvements in JOSB, and capital returns will drive upside in the stock, particularly given TLRD’s 30% short interest.

Why does this opportunity exist?  

1. The equity market still thinks TLRD is a distressed credit - but all of TLRD’s debt trades above par now.    
2. It has lost its following and has little equity sellside coverage – only DB and Jefferies.  It still gets more coverage from credit analysts than from equity.  
3. Investors fail to distinguish TLRD versus more secularly challenged brick and mortar retail.  The competitive and demand dynamics for TLRD are completely different than for department stores and mall-based retail.
4. Asset allocators are not TLRD’s customers, and therefore the business model is fundamentally misunderstood by the $2k-suit crowd.  In the MW banner, TLRD’s core customer is a 20-something male who has never purchased a suit before. The in-store wardrobe consultant is a commission-based sales person who helps put together a complete starter wardrobe for the customer.  The customer comes in to purchase his first suit, and TLRD can send him out the door with 1-2 suits, shirts, shoes, and accessories. Now, that customer is a repeat patron until/unless they upgrade themselves to the $2k-suit socioeconomic class.
5. Investors think online made-to-measure suit start-ups can disrupt TLRD.  They can’t. Online-only made-to-measure is a fundamentally flawed business model.  There is no digital or DIY solution that can replicate an in-store fitting. The lead times for that business model are long, and the return rates (i.e., suit doesn’t fit appropriately and so the customer sends it back) are prohibitively high.  TLRD’s custom suit business can deliver a higher quality product with much faster delivery, and TLRD has an uncontested nationwide market presence through its brick and mortar stores (a store within 10 miles of 70% of all men in US and Canada).

BUSINESS OVERVIEW

I will supplement the business overview from my Feb 2016 write-up here (see here: Feb 2016 VIC Writeup).

Recently, Doug Ewert retired as CEO, and Executive Chairman Dinesh Lathi stepped in to run the Company as the CEO search is underway.  Dinesh has operational experience and has been with the company for 2.5 years. Doug Ewert joined as CEO in 2011 and wrested control of the Company away from its founder, George Zimmer, in 2013.  He oversaw the calamitous acquisition of JOSB, and Doug is generally viewed with ambivalence by the investor community. His departure will likely prove to be a neutral or positive event for the Company.

Since 2016, the Company has successfully executed its rationalization of unprofitable stores, primarily in the JOSB banner.  JOSB stores have been reduced from 625 to 487. MW Tux stores have been reduced from 160 to 49, as these stores are consolidated within larger format MW banners stores.  Store counts for the MW, Moores, and K&G banners are stable (up slightly) since then. Today, TLRD has 1469 locations, 49% MW / 33% JOSB / 9% Moores / 6% K&G. Its retail revenue is 57% MW / 24% JOSB / 11% K&G /  7% Moores.

Comparable sales growth has trended +LSD%, while both GM% and EBITDA margins are stable.  Mgmt noted an acceleration in trends coming out of 2Q, and increased its comp growth for the year.  With modest capex needs and declining interest (from debt paydown), cash flow conversion is nearly 50%.  Furthermore, TLRD continues to reduce inventory and has been able to take substantial cash out of working capital over the past several quarters.

The JOSB banner, which was in steep decline in 2015 (-16% SSS) and 2016 (-9.5%) following its acquisition by TLRD, has stabilized and partially rebounded (+5.4% in 2017 and +LSD this year).  However, it’s earnings contribution remains minimal despite being a $135mm EBITDA business prior to being acquired by TLRD. The rationalization of unprofitable stores is largely complete, but there will be some continued benefit as certain leases roll off in coming quarters.  A return to more substantial profitability is upside optionality.

TLRD’s key growth initiative currently is in its custom suit business.  Custom is higher ASP and higher EBIT dollars versus rental or off-the-rack.  This business is run-rating at $4mm per week, versus $2mm per week in 2017. There is a growing preference by customers to purchase a custom suit or tux, rather than rent or purchase off-the-rack.  Custom suit purchasers register higher satisfaction ratings, shop more frequently, and have a higher annual spend than off-the-rack customers. Custom currently accounts for ~20% of TLRD suit sales, but top performing stores have achieved over 50% penetration for custom.  TLRD can offer standard 3-4 week delivery on the most popular price tiers for custom suits. Premium custom suits are manufactured domestically and can be delivered in two weeks. This is well below the 2-3 month lead times that are common for made-to-measure custom suit product by smaller competitors.  They are also rolling out a “Custom Express” offering that can deliver a custom suit in 7 days. Custom Express will be rolled out to all banners in 3Q.

CAPITALIZATION

CONCLUSION

TLRD is a stable and highly cash generative business.  Its stock’s high-teens FCF yield reflects a glaring disconnect from the fundamentals and the yield on its bonds.  Current levels offer significant upside from multiple expansion and FCF, used for further deleveraging and capital returns.  Based on 7.5x 2019 EBITDA and 9% FCF yield, TLRD is worth $40/sh (+90% upside).  Furthermore, TLRD has upside optionality from a return to profitability in the JOSB business.  It also represents an attractive take-private candidate for a private equity sponsor, given its stable and robust cash flow.  Dinesh has a background in private equity, and it is not unthinkable that he may use this opportunity (mgmt transition) to take the company private.

DISCLAIMER:  DO NOT RELY ON THE INFORMATION SET FORTH IN THIS WRITE-UP AS THE BASIS UPON WHICH YOU MAKE AN INVESTMENT DECISION - PLEASE DO YOUR OWN WORK.  THE AUTHOR AND HIS FAMILY, FRIENDS, EMPLOYER, AND/OR FUNDS IN WHICH HE IS INVESTED MAY HOLD POSITIONS IN AND/OR TRADE, FROM TIME TO TIME, ANY OF THE SECURITIES MENTIONED IN THIS WRITE-UP.  THIS WRITE-UP DOES NOT PURPORT TO BE COMPLETE ON THE TOPICS ADDRESSED, AND THE AUTHOR TAKES NO RESPONSIBILITY TO UPDATE THIS WRITE-UP IN THE FUTURE.

Catalyst

Ongoing execution
Capital returns
Further debt paydown