Photographer: Andrew Harrer/Bloomberg

Men’s Wearhouse Confronts a New Label: 'Uninvestable'

  • Combined company valued at third of pre-acquisition market cap
  • Barclays: `No confidence that management has a handle on it'

Men’s Wearhouse Inc. looks like it’s starting to unravel.

Eighteen months after buying rival Jos. A. Bank Clothiers Inc. in what is now widely seen as a disastrous $1.5 billion deal, the apparel chain is fighting to show it can survive. Its shares and bonds have plunged as investors question the company’s ability to reverse a nerve-shaking decline in sales at the Jos. A. Bank division.

“We view Men’s Wearhouse as effectively uninvestable,” Barclays Plc credit analyst Hale Holden said in a research note. The decline at Jos. A Bank is “alarming and provides no confidence that management has a handle on it.”

The problems gained fresh urgency Thursday after Men’s Wearhouse said same-store sales at the Jos. A. Bank division dropped 35 percent in the first five weeks of this quarter, which may force the company to miss a forecast it gave just last month.

Chief Executive Officer Doug Ewert’s big idea to improve Jos. A Bank’s sagging results was to discard the “buy one suit, get three free” promotion that had anchored its results for years. Ewert saw the giveaways as unsustainable and shifted to more traditional discounting, such as two suits for $500. Unfortunately for Men’s Wearhouse, loyal customers used to the sweeter deals stayed away.

Penney Lesson

Ewert isn’t the first retail chief executive to find that messing with a discounting model can be poisonous. In 2012, J.C. Penney CEO Ron Johnson pulled most of the department-store chain’s signature promotions, but sales collapsed, leading to his ouster. The company is still recovering from that near-death experience.

“Make no mistake, the Jos. Bank customer responds to promotions, and this will continue to be a promotional brand,” Ewert said Thursday on a conference call. “While we’ve removed the most destructive promotions -- the Buy One, Get Three or More Free -- we will continue to test, learn and listen to our customers.”

To speed up the turnaround at Jos. A. Bank, Men’s Wearhouse is now working with consulting firm Alix Partners to examine more aggressive steps, such as job cuts. They have a lot of work to do, analysts say.

“They are an average, run-of-the mill retailer that has weak sales and increased price competition at a time when low- and middle-income consumers have had no growth in their income,” said Margie Patel, a money manager for Wells Capital Management in Boston, which oversees $351 billion. “It’s not a very positive story.”

Potential Buyer?

A bright spot is that the Men’s Wearhouse brand is growing, with sales increasing 6.7 percent last quarter. Given its sagging stock price, that could attract a potential buyer, according to Holden, the Barclays analyst.

The company has a market valuation of $739 million, down from $2.7 billion in June 2014, when it completed the Jos. A. Bank purchase. Holden also noted that Eminence Capital, the activist investor that pushed for the merger, is still the chain’s largest shareholder.

Men’s Wearhouse fell 3 percent tp $14.81 at the close of trading in New York, bringing the stock’s decline for the year to 66 percent.

The price of its $600 million of 7 percent bonds due 2022 also plunged, dropping 8 cents to 65 cents on the dollar, according to Trace, the Financial Industry Regulatory Authority’s price-reporting system. The decline in the debt, which had been trading for more than 104 cents on the dollar just over a month ago, has pushed the yield to almost 16 percent.

Standard & Poor’s on Friday lowered its corporate credit rating of Men’s Wearhouse to B, five levels below investment grade, from B+. The ratings company has a stable outlook on the retailer, saying that weak same-store sales at Jos. A. Bank will be offset by the performance of other divisions.

Debt Payments

Men’s Wearhouse also said in a statement it wouldn’t be paying down its debt this quarter beyond the scheduled principal payment of $1.75 million on its term loan. The company will delay deciding whether to make optional prepayments until next year, it said on a conference call. The retailer doesn’t plan to make changes to its dividend payment and would consider making bond repurchases when it resumes optional debt repayments.

If Jos. A. Bank’s problems continue through the rest of the quarter, the company risks missing the low end of the forecast it gave last month, Men’s Wearhouse said.

“Given the infrequent shopping habits of the male consumer and the need to re-educate the core Bank’s customer and attract a new customer, the turnaround will likely be prolonged,” Richard Jaffe, an analyst for Stifel Financial Corp., wrote in a note to clients. “Although the company has begun to put strategies in place to improve Jos. A. Bank’s profitability, the timing and effectiveness remains uncertain.”

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