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Andrew Kuhn

Tailored Brands (TLRD): The Biggest Men’s Formalwear Retailer in the U.S. is a Stable Company With a P/E of 3 – And Caught in the Midst of the Retail Apocalypse

by JONATHAN DANIELSON

by JONATHAN DANIELSON

Tailored Brands is the company behind the brand names Men’s Wearhouse (MW) and Jos. A Bank (JOSB). As you can probably guess, Tailored Brands operates in the specialty retail industry. More specifically, they provide the younger-to-older middle-class male demographic with suitwear. Broadly speaking, their portfolio of clothing includes suits, sport coats, slacks, business casual, outerwear, dress shirts, shoes and accessories.

 

I don’t want readers to be misled by the title of this article since I labeled the company as “stable”: Tailored Brands is a high-risk stock. I classify Tailored Brands as a stable company because if you take a look at the company’s stock chart, you’ll see that over the course of the past year TLRD is about 85% off its highs. The stock was trading at $30/share as recently as June of last year. It’s at $5/share now. With a drop that dramatic you would usually expect to find one or more of a few things going on with the company. You would probably expect sales or earnings to be down quite materially. Or you’d expect to find impending liquidity issues. But that’s not necessarily what we find here. Top-line consolidated sales since 2015 are basically flat. Operating income is up 20% since then. Whether or not these are good numbers doesn’t matter right now. At least initially, the business doesn’t seem to have fallen off a cliff; yet the stock certainly has. So why is the stock high-risk? Well, a lot of reasons. One factor that adds to the riskiness of the situation also makes the stock look cheaper. All of you reading this can probably guess what I’m referring to: leverage. Despite aggressively paying down debt over the previous few years the company is still saddled with debt that equates to 3x EBITDA. Anytime you have a business where the popular sentiment is that the business is possibly facing a secular decline (i.e. the market is not too hot about the company’s growth prospects) and you add a highly-levered balance sheet to the mix you tend to get a stock that looks ridiculously “cheap” on standard valuation metrics. These dynamics make the stock high-risk.

 

Geoff recently wrote-up Farmer Mac (Ticker: AGM) on this site. If you haven’t read that post yet, you should go do it before reading on. In his write up of the Company he said, “An investor interested in Farmer Mac should spend 95%+ of his time worrying about the risks.” And why is that? Why spend so much time pondering the risks of the stock? Because, in his case, the stock he was evaluating was far, far too cheap for the quality of the business. So the only question relevant to investors is: what are the potential catastrophic risks? Will the company survive? If the Company survives then the stock should be a homerun.

 

I think Tailored Brands is very much the same. It’s not that I’m not making the argument that a specialty retailer is an especially good business. What I am saying is that if TLRD is still trading in 5 years, it’ll almost certainly be trading higher than it is today. Probably a lot higher. And here’s why: The Company did about ~$322 million in cash flow from operations in 2018. Capital expenditures are very low in the business. They have averaged around $90 million in the past few years. So we can call free cash flow $232 million. It certainly isn’t less than $200 million, if you want to debate that a higher figure for cap-ex is correct.

 

TLRD’s market cap is $285 million.

 

You read that correctly.

 

The market cap of the business roughly approximates free cash flow. The dividend yield is close to 12%. If the business in its current form survives, the stock is far, far too cheap. On a levered basis (P/FCF), it’s trading for about what it generates in cash each year.

 

Of course, you might be inclined to point out that I just stated the business is extremely levered. And fair enough. We’ll save the in-depth discussion of valuation for later in this post, but let’s get a quick overview of what the company looks like on an enterprise basis. So if we account for the leverage in the business we get an EV/EBIT of ~5.5. As always with levered companies, on an enterprise basis the stock doesn't look as cheap. It’s still very cheap though. Too cheap if it is going to survive.

 

So, naturally, the question becomes: Will the Business Survive?

 

The Business

 

But before we tackle the question of if the company will survive, we first have to understand the actual business. Broadly speaking, Tailored Brand as two main operational segments: The Retail Segment - where they sell the actual product (suits) and rent out the product - and the Corporate Segment where they provide both UK and US businesses with uniforms and other similar workwear apparel. The Retail segment vastly dwarfs the Corporate segment as it accounts for a little over 90% of total revenue. So we won’t be talking about the Corporate segment very much. The Retail segment includes selling tailored product (46% of retail sales), non-tailored product (32%), providing alterations (13%), and rental services (5%). The brands behind Tailored Brands include Men's Wearhouse, Jos. A. Bank, Moores and K&G.

 

Tailored Brands is the largest provider of men’s formal attire in the United States. In total the Company has 1,464 stores. Like most specialty retailers operating today TLRD has, in aggregate, been steadily rationalizing their store base. Since 2016 total store count is down roughly 15% (~200 stores). With most of these store closures coming from Jos. A Bank and MW Tux shops as the total number of Men’s Wearhouse stores are up, albeit only slightly. As of February of 2019, the type of each store is broken down as follows: 719 Men’s Wearhouse retail apparel stores in all 50 US states, 46 Men’s Wearhouse and Tux stores in 22 states, 126 Moores retail apparel stores in 10 Canadian provinces, 88 K&G stores in 27 states, and 484 Jos. A. Bank retail apparel stores. The Company tells us all of these stores are leased.

 

Both Men’s Wearhouse and Jos. A Bank target essentially the same demographic. Management claims that Men’s Wearhouse serves a slightly younger crowd. I haven’t seen any proof of that by way of statistics, but let’s go with it for now. What they both seek to accomplish is to be the one place middle class guys can go to be suited for their formal wardrobe. Whether that’s a 25-year-old landing his first white-collar corporate job, a 50-year-old looking to add a blazer to his selection of workwear, or a teenager going on his first prom date - MW and JOSB both want their business. The sales team is trained to be very “hands-on”. They want to assist you with product knowledge and help you achieve the style you’re going for. In FY 2016, the Company introduced custom apparel for their suits at Jos. A. Bank. These products are personalized depending on what the customer selects from a variety of pre-established combinations. The option for custom apparel is available at MW and Moores as well. In 2018 sales from this segment more than doubled to $200 million. Customers typically get their merchandise in less than a month and this seems to be a growing method of choice for consumers.

 

On the rental side of the business, Management appears to be continually winding the MW Tux stores down and instead incorporating this line of business within the full-line stores. It’s not that Management is moving away from the rental business, however. Revenue from this segment in total hasn’t declined much over the past 5 years (staying at around 12% of total revenue), however the Company’s stated strategy has been to start servicing these customers through their full line stores. These stores have a smaller selection than the flagship stores as customers only have access to the more limited rental products. Most of these stores are located in regional areas and in malls. These stores are much smaller than the standard MW store, standing at roughly 25% of their counterpart’s store size as measured by square feet. Since 2014 the company has closed over 150 of these store locations, which equate to ~80% of stores. As of 2019, there are 46 stores in 22 states under the Men’s Wearhouse and Tux brand.

 

Buy One Pair Of Socks Get 7 Suits For Free!! (Or AKA some terrible advertising)

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We’ve all seen the ads. They truly are notorious. The ads were essentially you could get 75% off of a suit. This is because you paid “full price” for one suit and you got three others for “free” (the actual promotion wasn’t get 7 suits, as far as I’m aware.). Unlike many companies we see in today’s market, Jos. A Bank (when it was a standalone entity) wasn’t hemorrhaging cash in order to scale. They just marked their initial product up tremendously. So instead of offering you 25% off of a $400 suit, they’d charge you $1000 for the first one and include three others. These ads certainly are eye-popping. The crazy thing here to me is that they actually worked pretty well - there’s got to be a mental model in here somewhere (in fact Munger has almost certainly talked about it before). Before they were acquired by MW, Jos. A Bank was a fast growing (~10%+ top-line growth yoy) little retailer generating 10%+ operating margins. People thought they were getting a great deal, and the company grew because of it.

 

What happened next is almost certainly being studied by a Harvard graduate student somewhere. We’ll coin it the most Ill-Fated Acquisition in the history of all of retail. In 2013 Men’s Wearhouse received a buyout offer from Jos. A Bank, who was a younger and smaller competitor at the time. The merger proposal turned hostile when the Board of MW promptly refuted the offer as “inadequate” and adopted a poison pill in attempts to stave off the potential acquirer.

 

To much surprise Men’s Wearhouse then countered the takeover bid with one of their own to take over the assets of Jos. A Bank. What followed was the all too familiar bidding war, where each company continually raises its offer price in attempts to avoid “losing” to the other. Unsurprisingly, as is typical in a scenario like this, shareholders ultimately lost in the end. Men’s Wearhouse won the takeover battle and saddled its balance sheet with $1.7 billion in debt to do it.

 

Management’s rationale for the acquisition was largely due to their belief that the way in which JOSB was marketing itself was “cancerous.'' They said it ultimately led to customers having too many suits then they really wanted, and lower margins for the business. So they set out to right the former management’s wrongs. Their aim: kill the promotions. Stop tarnishing the JOSB brand name in order to pull sales forward. I don’t think I’m the only one who noticed how eerily similar this rhetoric is to Bill Ackman’s attempts to upend JC Penny’s promotional strategy. We all know how that turned out (if you don’t, JCP is highly anticipated to be entering bankruptcy courts).

 

Turning back to TLRD, it soon became painfully clear how difficult it is to change customer’s addictions to promotions. Comps for the JOSB brand that year came out to negative 16%. The following year: negative 9.5%. Management’s massive blunder was now blatantly clear to everyone involved. In 2016 the company issued a press release that let investors know how valuable the Jos. A Bank brand - the brand that management just spent $1.8 billion in shareholders money on - was now. The answer? The brand was basically worth nothing. In a press release the company told investors the following:

 

●       A write-off of the entire carrying amount of Jos. A. Bank's goodwill, or $769 million.

●       A charge off of $335.8 million associated with the Jos. A. Bank tradename, which leaves its remaining value at just $113.2 million.

●       The entire carrying amount of the Jos. A. Bank customer relationships of $41.5 million.

●       The writedown of favorable leases connected with its acquisition of Jos. A. Bank valued at $7 million

Following that news, the Company said it also was going to be closing as many as 139 Jos. A. Bank stores, 22% of what was the total fleet. Moving forward to 2019, TLRD has closed 141 stores, and comps have been positive for the past two years at Jos. A Bank. As awful as it was, it seems the rationalization of the JOSB fleet is largely over. Things look a lot more stable. 

Durability

I told you at the outset that the main concern with this stock to investors is if it will be around in 5 or 10 years or not. By no means is that a straightforward question to answer. But here’s what we know:

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