The Men’s Wearhouse Inc. has lofty ambitions — to become the largest seller of men’s apparel in the United States — but Wall Street has some doubts about the plan.
Currently at number three behind Macy’s Inc. and Kohl’s Corp., the retailer is projecting sales of $3.7 billion by the end of 2017 as it works to absorb its former rival and latest conquest, Jos. A. Bank Clothiers Inc. Together, the companies had sales of $2.6 billion in 2013.
In an analysts’ presentation in New York City on Tuesday morning, Men’s Wearhouse management said that over the next three years the combined company will have earnings before interest and taxes of $500 million, an average comparable-store sales increase of 2 to 3 percent, and will open 30 full-line Men’s Wearhouse stores a year until it reaches its goal of 750 units, a number the retailer expects to hit in 2016. Currently, there are 653 full-line Men’s Wearhouse stores.
Shares of the stock were hit hard Tuesday when investors appeared to be disappointed that the merger between the two companies won’t produce cost savings as soon as some had expected.
The stock dropped 9.9 percent to $51.66 with nearly six million shares trading hands — well above the 651,000 daily average for the past three months.
Analyst Janet Kloppenburg of JJK Research said some investors were expecting the company to realize the full benefit of the deal’s $100 million to $150 million synergies in 2016, but Men’s Wearhouse said those savings won’t be fully realized until the following year.
“It was just the semantics,” Kloppenburg said. “Expectations might have been a little bit higher. It’s still a great story and is going to be a very impactful integration in terms of cost savings.”
In “sharing our vision for the growth of Men’s Wearhouse,” Doug Ewert, president and chief executive officer, said that after a rough 2012, all divisions are on the rebound. For the fiscal second quarter to date, comparable sales are up 3.6 percent at Men’s Wearhouse, 2.4 percent at Jos. A. Bank and 8.3 percent at Moores, the company’s Canadian division. Even the beleaguered K&G division, which has been under strategic review since last year, is running 5.1 percent ahead for the period.
Ewert said that since the $1.8 billion acquisition of Jos. A. Bank was completed last month, the company has been working to integrate the two men’s wear chains, which will remain separate. Among the findings is that there is “very little customer overlap” between the two businesses, with only 7 percent of customers shopping both retailers over the past four years. And even though 65 percent of Jos. A. Bank’s stores are within five miles of a Men’s Wearhouse unit, he added, “We have observed very little cannibalization.”
The Men’s Wearhouse customer is generally 25 to 55 years old, style-conscious and contemporary, he said, with an average household income of $75,000 a year. Jos. A. Bank, in contrast, appeals to a shopper aged 35 to 59 years old who is traditional and conservative and makes $100,000 to $125,000 a year.
Ewert believes there are major opportunities to increase sales at Jos. A. Bank by growing tuxedo rentals, Made in the USA suits, made-to-measure merchandise, updated traditional merchandise offerings and the percentage of national brands. At the same time, the company will work to grow the sportswear penetration — especially sweater sales — at Men’s Wearhouse stores, a category where Jos. A. Bank has an advantage.
Overall, Men’s Wearhouse expects to achieve $100 million to $150 million in synergies from the combination of the two firms, executives said.
Specifically, this breaks down to $46 million in general and administrative savings; $30 million in cost of goods; $14 million in store savings; $8 million in e-commerce, and $6 million in advertising and marketing, said Jon Kimmins, chief financial officer.
Kimmins said that while 30 new Jos. A. Bank stores will be added this year, the expansion will then be put on hold until Men’s Wearhouse has a better chance to review the operation of the chain. Although he said the company believes there is “some opportunity” to grow” the Jos. A. Bank store count, currently at 586, the decision on how and when to add stores will be made in the future.
Tuxedo rentals, a cash cow for Men’s Wearhouse and a business that accounts for 17 percent of its revenue, or $430 million, is seen as a growth opportunity for Jos. A. Bank. Currently, Jos. A. Bank’s tuxedo rental business is significantly smaller and the firm contracts with an outside company to fulfill orders. Men’s Wearhouse owns its tuxedo inventory and has an in-house dry-cleaning service to clean the garments. Moving Jos. A. Bank to that system will save $3 million, the company said.
The Jos. A. Bank stores average 4,581 square feet compared to 5,710 square feet at Men’s Wearhouse, raising questions on how to service the tuxedo customer in a smaller footprint.
Outside of tuxedos, Mary Beth Blake, executive vice president and chief merchandising officer, said Men’s Wearhouse sells 51 percent fashion merchandise and 42 replenishment merchandise, while Jos. A. Bank sells 20 percent fashion and 47 percent replenishment. Slim suits represent 45 percent of sales at Men’s Wearhouse and only 13 percent at Jos. A. Bank, “so we see an opportunity to grow slim-fit at Bank,” she said.
The same for big and tall. At Men’s Wearhouse, the category accounts for 24.5 percent of sales, but only 11.1 percent at Jos. A. Bank.
Even so, both chains will “remain brand specific” with a “clear and distinct voice for each,” she said. And for the time being, the aggressive buy-one-get-two-or-three-free promotions at Jos. A. Bank will continue. Although Men’s Wearhouse prefers a buy-one-get-one-free stance, Jos. A. Bank’s eye-popping sales are popular with customers and allow the company to clear inventory. But long-term, the firm will “wean off the most margin-erosive events,” she said.
She said the merchandise turn at Men’s Wearhouse is 25 percent faster than at Jos. A. Bank, but the company expects that by improving systems at Jos. A. Bank, inventories can be reduced by $40 million to $60 million.
Blake said 98 percent of the merchandise at Jos. A. Bank is exclusive, as is 56 percent at Men’s Wearhouse. This gives the company over $700 million in buying power, she said, noting that the company is targeting $30 million in cost savings from combined merchandising and sourcing.
Although the Joseph Abboud brand of apparel is not going to be added to Jos. A. Bank stores, Joseph Abboud, the company’s creative director, will have some input into Jos. A. Bank’s merchandise offerings. He hopes to infuse the stores’ traditionally skewed merchandise with more fashion. He said classic men’s wear does not have to be “stodgy. Traditional doesn’t have to be boring.” By updating the look, he said, Jos. A. Bank can better compete with “the Brooks Brothers and Ralph Laurens of the world. We should take a leadership role at Jos. A. Bank that we stand for modern and traditional.”
Men’s Wearhouse, in contrast, will be “a little more irreverent.”
Abboud also revealed that the younger-skewed Joe brand, formerly exclusive to J.C. Penney, would make an entrance into the Men’s Wearhouse stores this fall.
Since being introduced into Men’s Wearhouse and Moores stores this spring, the Joseph Abboud branded merchandise now accounts for 13 percent and 9 percent of sales, respectively, according to Blake. The label is currently in all Canadian stores and will be rolled out to all Men’s Wearhouse stores by the end of October. “The early results have exceeded our expectations,” Ewert said, noting that the brand is bringing in new customers and has resulted in higher average ticket sales.
A typical Joseph Abboud suit, made in the company’s New Bedford, Mass., factory, sells for $495, down from the $795 to $1,000 retail that it was last season when it was a wholesale brand. At Men’s Wearhouse, made-to-measure suits can be ordered for $100 more and are available in three weeks.
One thing that Men’s Wearhouse is embracing from Jos. A. Bank is its tailoring system. Men’s Wearhouse employs an average of 2.5 tailors per store with a seven-day turnaround, while Jos. A. Bank only has one tailor on staff and uses outside seamstresses and tailors to complete orders. “That model is more profitable,” said Mark Neutze, executive vice president of store operations, noting that $3.5 million in savings can be realized if $25 million of Men’s Wearhouse tailoring orders are transferred to that system.
The company is also hoping to boost its business in the fourth quarter when Jos. A. Bank has traditionally posted better results.
Because Jos. A. Bank already operates 42 outlets, the company will put the brakes on its plan to add to its eight Men’s Wearhouse outlet stores. Although it had originally planned to open as many as 100 outlets, inheriting the Jos. A. Bank outlets brings the company “way down that road,” said Kimmins.
During a question-and-answer period at the end of the briefing, Ewert said he hoped to soon provide an update on the planned “disposal” of the K&G division. And while its corporate apparel division is performing well, he said it did not fit into the company’s “long-term goal to be the largest men’s apparel retailer in the U.S.”