Friday, November 8, 2013

You Won’t Like the Way You Look: Men’s Warehouse rejects Jos. A Bank’s Merger Offer as Insufficient



Here's the Story: See the justification for rejecting the offer toward the bottom

Jos. A. Bank Clothiers Inc. has approached Men's Wearhouse Inc. about a combination of the two companies, according to people familiar with the matter, a proposed deal that would create a nationwide powerhouse in men's apparel.

It isn't clear whether the approach, made in recent weeks, will lead to a deal or what form any such tie-up would take. With a market value of $1.17 billion, Jos. A. Bank is smaller than Men's Wearhouse, a seller of discount suits that sports a market value of $1.68 billion.
Spokespeople for the two companies couldn't be reached for comment.

Merging Jos. A. Bank and Men's Wearhouse could help the companies cut costs and otherwise bolster themselves in a tough sales environment. Jos. A. Bank, based in Hampstead, Md., is a more than century-old company with over 600 stores selling men's tailored and casual clothing, according to its website. Men's Wearhouse, meanwhile, has 1,137 stores, according to its website. Its Men's Wearhouse, Moores and K&G stores sell suits and sport coats; the company is also in the lucrative tuxedo-rental business.

Men's Wearhouse has recently experienced turmoil in its boardroom. In June, the company's chairman, George Zimmer was ousted in a public spat between him and others at the company he co-founded 40 years ago, a dispute that centered on his desire to take over the company. Mr. Zimmer said at the time that he had disagreed with the company's direction and "the board has inappropriately chosen to silence my concerns."

Mr. Zimmer opened the first Men's Wearhouse with a hand-painted sign and $7,000 in 1973 and has been the face of the retail chain's advertising ever since. With his gray beard and avuncular manner, Mr. Zimmer delivered his signature line in television commercials: "You're going to like the way you look. I guarantee it."

He recently held 3.7% of the company's stock, making him one of its largest shareholders, according to FactSet. It is unclear whether Mr. Zimmer is involved in discussions about the company's future.

The company (MW) has reworked its inventory to suit a younger audience in recent years. It added a slim-fit line and now rents some 3 million tuxedos a year to people ages 18-30. Its results have been under pressure lately, however, with fiscal second-quarter net sales—reported in September—falling 2.3% to $647.3 million. Men's Wearhouse said then: "While the Company continues to feel confident about its merchandising and operating strategies, it has become increasingly concerned about the current macro trends in the apparel industry."

Jos. A. Bank has also faced headwinds lately, last month reporting a 10.7% drop in sales to $232.5 million in its fiscal second quarter. In a news release then, the company's Chief Executive R. Neal Black said: "Customers did not respond as well to some of our highly promotional marketing campaigns as they did in the prior year."

JoS. A. Bank in June said in a statement that it's "considering strategic opportunities to enhance shareholder value, including seeking potential acquisitions to facilitate additional growth.
Jos. A. Bank had no debt and more than $300 million of cash and short-term investments in August, which could help it mount a bid for its larger rival.

Jos. A. Bank sells men's tailored and casual clothing, sportswear and footwear. While it targets a more established male professional, it's known for generous promotions like buying one suit or sport coat and getting three for free.

Houston-based Men's Wearhouse sells men's sportswear and suits through its namesake chain of stores, as well as the Moores and K&G retail chains. Recently, it's been going after younger shoppers with suits with slimmer silhouettes. It's also trying to raise the average ticket price and announced in July that it's buying upscale Joseph Abboud brand for about $97.5 million in cash.

Still, Men’s Wearhouse appears to have been unmoved by the offer. In its response on Wednesday, the company emphasized that it has twice as many stores as Jos. A. Bank and that it had reported 13 consecutive quarters of growth in same-store sales in its core stores; by contrast, its competitor has reported three straight quarters of declining revenue.

Men’s Wearhouse also defended its plans to right itself, including by exploring a sale of its low-margin K&G division and building on its acquisition of the higher-end Joseph Abboud brand. It argued that Jos. A. Bank was trying to seize upon what it described as a short-term drop in its stock price.

Men’s Wearhouse October Investor Presentation: Justification for rejecting the Jos. A Bank Offer (Source: Men’s Warehouse website)
#1- Jos. A Bank taking advantage of temporary dip in MW stock price (Slide 4)
#2- MW’s sales, EBITDA and EPS all growing- faster than JA Bank (Slide 5)
       EBITDA:  Earnings Before Interest, Taxes, Deprecation and Amortization
       CAGR: Compound Annual Growth Rate
            Definition: The rate at which the investment would have grown, it
                            It grew at a steady rate.
#3- MW stock share repurchases: Increase shareholder return (Slide 6)
    How? Fewer shares outstanding, same dollar amount of earnings
          = higher earnings per share
#4- Same store sales growth: A key financial measure for retail stores (Slide 7)
      Why? Indicates that your retail plan is succeeding…
                Store performance improving.
#5- Free cash flow increases allow for MW business expansion
      Free Cash Flow (Defined): Operating cash flow less capital expenditures
        In other words: Represents cash generated after paying for asset needs
        (Source: Investopedia)
#6- MW Tux Business: Higher margins, brings in younger shoppers
         300,000 wedding parties, 50,000 proms in 2012 (Slide 11, 13)
#7- Joseph Abboud Line: Sell higher apparel. Increases
        overall profit margin (Slide 12)
#8-  Jos A Bank customers very price sensitive, due to aggressive

        discounting (Slide 33). As a result, risk to JA Bank’s margins

You'll find these financial concepts explained in my management accounting videos. Here's a link to those You Tube videos, with links and titles for each video:

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Ken Boyd
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Wednesday, May 1, 2013

The Two Ways You Raise Money to Run Your Business (Capitalization)

There are two ways to raise money to run your business: equity and debt. You can sell ownership in your business by issuing stock. The stock purchaser is an owner of your business. On the other hand, you can issue debt. The other party is a creditor- not an owner. Now, finance has become pretty complex over the years. But the stock or debt decision still remains.

A professor I had described a banker as someone who checks the floor on all fours sides of the bed before getting up in the morning(!) It’s a nice visual that refers to the fact that bankers should be cautious people. After all, they are lending someone else’s money- not their own.

Commercial bankers are those that lend to businesses. They want to make sure that the company/ borrower has sufficient earnings to pay the interest on the loan, as well as the principal. So, your firm needs to have some “room” in your income statement. If your company takes out a loan, it wil have an additional expense for interest. There’s also a cash flow issue: the company needs enough excess cash to make interest and principal payments over the life of the loan.

Now, a company borrows money for a specific purpose. The goal is that the rate of return (profit) generated by the loan will more than cover the interest expense. If you borrow money for a new machine, maybe you can produce more product than the old one. If you produce and sell more product, your earnings can increase. If the increase in earnings is more than the interest expense of the loan, you’re financially better off.

Consider your cash flow. If you produce and sell more product, you’ll collect more cash. If the addition cash you collect is more than the principal and interest cash payments, you have more cash.

Ideally, our cautious banker would love a company that doesn’t have much existing debt- which means they don’t need much extra earnings (or extra cash) to make interest and principal payments. The banker would love a company with increasing revenue and earnings.

Which brings us to Apple Computer.

A recent Wall Street Journal article (“Apple's Record Plunge Into Debt Pool”, 5/1/13) explains the huge public interest in buying Apple’s recent debt offering. In fact, the article explains the “$17 billion offering investors hungrily gobbled up”. It was Apple’s first bond offering in 20 years.

“The technology company as able to borrow at rates nearly as low as the highest triple-A rated firms in the world”. Triple-A is the highest rating issued to companies that borrow money. A very small percentage of companies have a triple-A credit rating.

Bond rating companies give Apple a AA+ rating, based on “excellent liquidity and significant net cash balances”. In other words, Apple has a large number of assets that they could sell for cash- or convert to cash quickly (liquidity). Those assets include current assets, like accounts receivable. Apple also has huge cash balances. In fact, they issued the debt to finance cash needs in the U.S. Much of Apples cash is overseas. Apple issued the debt, in part, to avoid taxation on needed cash they might move from overseas.

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Ken Boyd
St. Louis Test Preparation
(cell) (314) 913-6529
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(twitter) @StLouisTestPrep                         
Author/ Cost Accounting for Dummies
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