Men’s Wearhouse, 8.1% Yield to Maturity, Maturing July 2022
For this week’s bond review, we take our second look at one of the largest specialty retailers of men’s suits in the U.S. and Canada. Men’s Wearhouse (and parent company Tailored Brands) recently released its results for the three months ended July 29, 2017. These results showcase a company that continues to refine its brand, pay down debt and increase profits.
Outstanding interest coverage of 4.3x.
Net earnings increased by 82% year-over-year.
Debt decreased by $43 million.
Cash on hand increased by over $100 million as compared to the same period in 2016.
Tailored Brands’ 2022 bonds, couponed at 7.0% and yielding over 8% are currently trading at a small discount. Income investors interested in these bonds can add diversification into the retail industry to their portfolio, while also adding a very competitive yield. As such, we have marked these bonds for addition to our FX2 income portfolio. The most recent performance of our managed FX2 portfolio is shown below.
Solid Q2 and Six Month Results
Men’s Wearhouse recently reported solid results for its fiscal year second quarter (Q2) for the three months ended July 29, 2017. Here are some of the highlights:
Net earnings in Q2 nearly doubled from the same time period in 2016, growing from $59.6 million to $108.5 million.
Earnings per share were $1.19, more than doubling earnings per share from Q2 2016 of $0.51.
Increased cash on hand by over $100 million in Q2 over Q2 2016 levels.
Tailored Brands / Men’s Wearhouse posted outstanding interest coverage for Q2. It registered operating income of $108.5 million and interest expense of $25.1 million for interest coverage at a whopping 4.3x.
In addition, the company’s results for the six months ending July 29, 2017 were also excellent.
Net cash provided by operating activities registered $140.5 million as compared to $100.3 million in the prior year period, an increase of 40%.
Healthy interest coverage for the six months ending July 29, 2017 of 2.8x (operating income of $139.5 million and interest expense of $50.6 million).
About the Issuer
Men’s Wearhouse (under the holding company Tailored Brands, NYSE: TLRD) is the largest specialty retailer of men’s suits and the largest provider of apparel rental products in the U.S. and Canada, with 1,484 stores. The company conducts its retail segment as a specialty apparel retailer offering suits, suit separates, sport coats, slacks, dress and casual shirts, shoes and accessories, primarily for men. Men’s Wearhouse offers its products and services through multiple brands including The Men’s Wearhouse/Men’s Wearhouse and Tux (“Men’s Wearhouse”), Jos. A. Bank, Moores Clothing for Men (“Moores”), K&G and Joseph Abboud and through multiple channels including physical stores as well as online and through its call center. Stores are located throughout the United States, Puerto Rico and Canada, and carry a wide selection of exclusive and non-exclusive merchandise brands. Tuxedo and suit rentals are offered at Men’s Wearhouse, Jos. A. Bank and Moores retail stores. In addition, the company offers its customers alteration services.
See how Fixed Income 2 (FX2), our managed high-yielding fixed income portfolios compare to our benchmarks below:
An Update Since Our Last Review
There are a few developments that are important to note regarding Men’s Warehouse since our last review earlier this year. First, the company has continued to optimize its real estate assets / storefronts, closing 283 stores in the past year. The company expects approximately 20 net store closures in 2017. Second, the company recently concluded its venture with Macy’s whereby they maintained tuxedo shops within Macy’s stores around the nation.
In 2017, Men’s Wearhouse / Tailored Brands has made a concerted effort to reduce its outstanding debt. Earlier this year, the company repurchased and retired $17.5 million in face value of its senior notes. Then in the second quarter, the company repurchased and retired an additional $25.1 million in face value of its senior notes. Management has indicated that improving the balance sheet is a high priority, indicating a high probability of future note repurchases.
Custom is King
Men’s Wearhouse has recently put a significant emphasis on custom clothing for its customers. Douglas Ewert, Tailored Brands’ CEO commented on the company’s most recent earnings call that “personalized solutions are an important strategic differentiator, and our strategy with custom clothing is to disrupt the traditional suit business by making a custom suit as easy and affordable to buy as a suit off-the-rack.” Ewert followed up this comment by noting that company research indicates that men who buy custom suits from the company are happier with their purchase, shopped more frequently and had higher annual spending rates than off-the-rack customers.
This tactic appears to be taking hold. Last year, it was reported that custom clothing was selling at a run rate of about $1 million per week. Throughout the first half of 2017, custom clothing is now selling at a run rate of about $2 million per week.
Today in the U.S. and Canada, there are approximately 110 million men ages 18 to 65. Of these, 30 million are currently members of one of Tailored Brands loyalty programs – around 27%. Put another way, nearly one in four men, ages 18-65 are members of one of the loyalty buying programs at Tailored Brands retail stores.
For a retail chain, that is an impressive statistic. This speaks to the strength and familiarity of the Men’s Wearhouse / Tailored Brands name.
Interest Coverage and Liquidity
Interest coverage is of paramount importance to bondholders as it indicates the issuer’s ability to service its debt. As discussed earlier, Mens Wearhouse / Tailored Brands posted outstanding coverage for Q2 of 4.3x. In addition, the company also has excellent liquidity. As of July 29, 2017, Tailored Brands had cash on hand of $112.7 million and $500 million available on its revolving credit facility.
The risk to bondholders is Tailored Brands ability to execute on its plan to right-size its number of stores, increase its custom clothing business, as well as continue to improve its balance sheet. The company just posted outstanding quarterly results, with fantastic net earnings, interest coverage and cash levels. The company continues to optimize its storefront locations and its focus on men’s custom clothing appears to be paying off, doubling in just the last year. Due to these considerations, the 8.1% yield to maturity on these July 2022 bonds do appear to outweigh the risks identified.
In general, bond prices rise when interest rates fall and vice versa. This effect tends to be more pronounced for lower couponed, longer-term debt instruments. Any fixed income security sold or redeemed prior to maturity may be subject to a gain or loss. Higher yielding bonds typically have lower credit ratings, if any, and therefore involve higher degrees of risk and may not be suitable for all investors.
Summary and Conclusion
Men’s Wearhouse had a fantastic second quarter. Profits increased, debt decreased, interest coverage was outstanding and the growth in its custom clothing sector was exceptional. Men’s Wearhouse is a well-known and established brand in the menswear industry. Its foray into custom clothing appears to be growing handsomely and could provide a robust profit center for the company moving forward. Its right-sizing of its storefronts make the company leaner, maintaining only those locations that are thriving. In consideration of these factors, Tailored Brands 2022 bonds make a sound addition to a diversified income portfolio and we have marked these bonds for additional weighting in our FX2 managed income portfolio.
Issuer: Men’s Wearhouse / Tailored Brands
Yield to Maturity: ~8.12%
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Disclosure: Durig Capital and certain clients may have positions in Men’s Wearhouse/Tailored Brands 2022 bonds.
Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. We welcome inquiries from other advisors that may also be interested in our work and the possibilities of achieving higher yields for retail clients.
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