3 Reasons Men's Wearhouse Stock Could Rise

By Markets Fool.com

Last June, Men's Wearhouse competed its $1.8 billion merger with clothier Jos. A. Bank. The payoff for this big deal still lies in the future -- for now it continues to create a drag on company performance. However, the overall tailored men's suits business continues to thrive. Men's Wearhouse achieved more than $3.2 billion in annual sales in 2014, a 31% increase over the prior year.

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Adding Jos. A. Bank to the portfolio accounted for 90% of Men's Wearhouse's sales growth last year. Nevertheless, there's good reason to believe Men's Wearhouse will maintain its own growth trajectory and grow the rest of its operations, leading its stock to follow suit. Here are three reasons why and how that can happen.

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Men's Wearhouse Stock vs. S&P 500, data by YCharts

1. Expand profitable tuxedo rentals
Men's Wearhouse is the largest provider of tuxedo rentals in the U.S. and Canada and holds an estimated 40% share of this $1.2 billion market. It offers rentals not only at 698 namesake stores, but also at another 210 retail outlets operating as Men's Wearhouse and Tux stores, generating more than $450 million in revenue last year.

While Men's Wearhouse closed 38 tux shops last year as more business shifted to its full-line stores, it is rolling out rentals to all of the 636 acquired Jos. A. Bank stores. It also offers rentals at its Moore's division and its 123-store Canadian operation.

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Men's Wearhouse also recently introduced a Joseph Abboud tuxedo, an aspirational luxury brand the retailer hopes to leverage into more sales. And it's entered into a preferred relationship with David's Bridal, the big-chain wedding specialist, further solidifying its leadership in the tuxedo rental market.

Everyone loves a well-dressed man, which could be key to helping sales grow. Photo: Steven Depolo via Flickr.

Some of the toughest competition may come from the online channel in the future. Shops like Menguin and Black Tux -- which got a lot of buzz earlier this year when it secured $10 million in financing -- are looking to tap into the formal-wear profit center.

And tuxedos are profitable. While Men's Wearhouse enjoys a gross margin of 54% for its retail business, it scored an 80% gross margin in tuxedo rentals last year. Expanding tuxedo rentals to all of its retail locations ought to help improve sales and margins further.

2. Improve margins by minimizing hyper-aggressive promotions
If there's one thing Jos. A. Bank is known for, it's the volume discounts it offers on its suits, or what Men's Wearhouse CEO Douglas Ewert terms the "buy one, get three free" environment.

While the typical 35- to 59-year-old male career professional is loyal to the Jos. A. Bank brand as a result of those promotions, Ewert believes there's an opportunity to wean him off that destructive strategy and delve deeper into his closet and sell him more clothes. Generating more revenue and giving fewer discounts ought to help bolster profit for the division.

Sales at Jos. A. Bank are still sliding, however. Though Jos. A. Bank's 6.6% decline in comparable sales last quarter was better than Men's Wearhouse's internal projections, its gross margin was lower than those produced by the legacy businesses and indicates there's a lot of work yet to do to turn that business around.

Ewert says 2015 is a "transitional year," meaning investors will need patience to see Jos. A. Bank's benefits. The "synergies" touted before the deal closed are said to be ahead of schedule, though. If that continues, Jos. A. Bank could help Men's Wearhouse surprise Wall Street with stronger-than-expected earnings.

3. Build Joseph Abboud into a $1 billion brand
The other meaningful acquisition Men's Wearhouse made was the Joseph Abboud brand for what seems like a steal at just $98 million. Joseph Abboud adds a touch of aspirational luxury to Men's Wearhouse's more workmanlike suits.

Introducing these higher-priced outfits at all of its Men's Wearhouse, Jos. A. Bank, and Moores stores should benefit brand awareness and sales. But perhaps more importantly, it can bring in new customers, because Joseph Abboud attracts a different clientele from the one that usually shops its stores.

Fortune recently noted that whereas an average suit costs $290 at Men's Wearhouse and $225 at Jos. A. Bank, a Joseph Abboud suit sells for between $600 and $800. The Joseph Abboud brand generated only around $230 million in sales in 2014, so quadrupling sales is a tall order. The expansion of the brand and bringing the brand back together with its namesake creator should help, though.

A power suit still makes a powerful statement, and Men's Wearhouse is looking to capitalize on industry growth. Photo: Men's Wearhouse.

Risks still abound
Menswear sales have been growing faster than women's clothes and are expected to do so for the foreseeable future. That's attracting more competition -- not just from online start-ups, either, but among department-store chains like Macy's and J.C. Penney: the latter of which is gaining traction with its own turnaround because of better men's department sales.

Men's Wearhouse trades at a discount to the industry, which suggests the market could be waiting for proof it can deliver on the promises it made when buying Jos. A. Bank. That offers hope to investors who believe all these goals are achievable and have an opportunity to buy in ahead of the rush.

The article 3 Reasons Men's Wearhouse Stock Could Rise originally appeared on Fool.com.

Follow Rich Duprey's coverage of all the retailing industry's most important news and developments. Heowns shares of J.C. Penney Company. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.