The good news is that the merger of Men's Wearhouse and Jos. A. Bank is producing the promised cost synergies. The bad news is that those synergies matter about as much as shiny cuff links on a dirty, torn dress shirt.
The company is a mess. While still anchored by the Men's Wearhouse chain, a brand that's been around since the 1970s, the parent company now bears the appropriately uncatchy name of Tailored Brands. What once had a market value of $2.5 billion is now worth $600 million. And stable revenue growth has turned to declines, as the company fumbles with Jos. A. Bank, for which it paid $1.8 billion almost exactly two years ago. (Yep, the merger cost triple what the combined company is worth today.)
Management -- which pursued Jos. A. Bank against the advice of Men's Wearhouse's founder George Zimmer, who was removed as chairman just before the deal -- estimated $100 million of cost savings annually by the end of 2016. On Thursday, CFO Jon Kimmins said that while the synergies are on track, the company's going to stop talking about them:
"Isolating their impact amidst all the other business activity is becoming less clear and less useful. So, we will stop reporting on merger synergies and focus more attention to current initiatives."
It's tough to tout the synergies while all the other numbers look so bad and you're scrambling to turn around the very business you paid a premium for two years ago. Tailored Brands' first quarter revenue and earnings came in below expectations, dragged down yet again by Jos. A. Bank, which suffered a 16 percent drop in comparable sales. The company's stock tumbled 21 percent Thursday.
Tailored Brands probably can't undo the acquisition now that it's saddled with $1.66 billion of debt. That's about five times the Ebitda analysts predict it can generate this year. There was some hope that Zimmer would attempt a coup, after a recent Inc. magazine interview in which he said he had been talking with private equity firms about potentially buying back his company. But Zimmer then threw cold water on his own comments during a Bloomberg TV appearance last week, saying such a move is "really unrealistic."
Where does that leave Tailored Brands? Well, here:
The retail environment is quite challenging, but Tailored Brands has brought much of its troubles upon itself. There's a reason that mergers rarely take place in this industry, and when they do, they're usually led by retail and restructuring experts with strong stomachs.
It's possible that this situation could attract small activist hedge funds, but would any have a smart plan to present? As it is, the company's top shareholder is Eminence Capital, an activist that pushed for the merger and now has some egg on its face. And forget buyout firms -- Tailored Brands already has far too much debt for their taste.
Analysts still covering Tailored Brands have "hold" ratings on the stock, so investors might have to just wait this out. CEO Doug Ewert seems to think the turnaround is starting to work. He pointed out that Jos. A. Bank's sales were less bad this time around...if you find that kind of thing reassuring.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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