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Men's Wearhouse quarterly earnings looked as fit and trim as the suits it sells, but not all segments are pulling their weight.
Men's Wearhouse spent a lot of time, energy, and moneyin acquiring rival, Jos. A. Bank, but nine months since the deal closed, investors still have nothing to show for it.
Fortunately, the company can still fall back on its legacy businesses, which powered a better than expected fourth quarter earnings report. In the wake of the latest earnings release, management wants you to know these five things about its retail operations.
1. Jos. A. Bank is, and will remain, a drag
Despite the fact Jos. A. Bank accounted for 91% of a $368 million increase in sales during the fourth quarter, it was still a disappointing performance, though within the range of expectations.
Jos. A. Bank comparable sales were down 6.6% for the quarter; gross margin ran below those produced by the legacy businesses of Men's Wearhouse namesake stores, K&G, and Moores; and profits for the business are not in the cards anytime soon. Instead, Men's Wearhouse President and CEO Doug Ewert said he expects 2015 to be a "transitional year" for Jos. A. Bank.
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Men's Wearhouse CFO Jon Kimmins added, "we expect the top line at Jos. A. Bank to continue to decline for the first half of 2015, and we do not expect to be able to make meaningful improvements in gross margin, while we are installing systems and transitioning the business."
2. In the meantime, legacy operations will do the heavy lifting
Where Jos. A. Bank is a work in progress, the rest of Men's Wearhouse is doing just fine. Even the discount K&G brand, which management had at one time considered selling off did quite well last quarter, posting a 6.8% year-over-year gain in comparable sales on the strength of higher traffic numbers.
Now that K&G will remain a part of Men's Wearhouse, it has returned to the earnings guidance -- its contribution helped lift the forecast to a range of $5.75 to $6.25 per share for 2017.
Moores, the Canadian unit of Men's Wearhouse, notched even better quarterly comp growth of 8.6%, while the parent stores recorded a 6.8% rise in same-store sales.
Ewert said management does not forecast any "heroic" measures, simply assuming "our legacy business can maintain modest growth and that the Jos. A. Bank business can get back on a growth path after what will have been several years of negative comps and after we have updated much of the Jos. A. Bank business."
3. Do not fear cannibalism
A good part of the effort to relaunch the Jos. A. Bank brand into recovery mode will come from introducing into stores the Men's Wearhouse tuxedo business and the aspirational suit business ofJoseph Abboud that the company acquired in 2013.
On the surface, that seemingly could eat away at Men's Wearhouse sales by simply transferring customers from one brand to the other. But because Jos. A. Bank customers are different from those that shops at Men's Wearhouse -- that was a key, strategic point in the acquisition, after all -- the sales gains ought to be incremental.
Instead, Ewert said he expects Men's Wearhouse and Jos. A. Bank to compete for customer growth, albeit from different pools. "I think that's a healthy competition and good for business and will give us 600 more stores of opportunity to attract customers to the great value that we see in the Joseph Abboud brand," Ewert said.
Tuxedos and more upscale suits are seen as providing a much-needed lift to sales. Source: Men's Wearhouse
4. Margins will jump when Jos. A. Bank gains traction
Right now, the new business is pulling profit margin down, whereasmargins were up across all the legacy brands. For full-year 2014, Jos. A. Bank gross margin was 500 basis points below the Men's Wearhouse brands, and growth is not expected to begin until 2016.
According to Ewert, "We expect profits to accelerate in 2016 as sales and margin at Joseph Bank start to rebound after three consecutive negative years, higher levels of both cost and revenue synergy take effect, and the legacy businesses continue to grow with at least modest and achievable growth."
5. Synergies will not be meaningful until then
Men's Wearhouse realized about $7 million in "synergy savings" in the fourth quarter from integrating Jos. A. Bank operations with its own, ending the year with about $35 million in total savings.Originally, the company forecasted $15 million by the end of 2014, and it still expects to realize $150 million when all is said and done.
But savings will not start adding up until this fall and should pick up speed after that, with an anticipated realized synergy benefit in 2015 of between $50 million and $55 million.
Men's Wearhouse doesn't plan on investing in new stores for Jos. A. Bank beyond the six that were already in progress when it purchased the chain. It will instead put its energy and money into its own stores.
But if all goes according to plan, the Jos. A. Bank acquisition could be a significant boon to Men's Wearhouse as it seeks to expand. Of course, acquisitions rarely go as planned. A lot of the success hinges on the one-time rival regaining its balance and growing, which means those hoped-for synergies could remain just out of reach.
The article Men's Wearhouse Inc: 5 Things Management Wants You to Know originally appeared on Fool.com.
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