Today, I am going to highlight an interesting value investment opportunity in a stock that has been in the limelight for the last few years due to transitions in the company's business model. The stock of the Tailored Brands (NYSE: TLRD) has performed exceptionally well in the last year and offered 82% return to its shareholders. The stock once touched $64 in June 2015 in anticipation of the synergies of the Joseph A. Bank's acquisition; however, the stock reacted foolishly and dropped to $11 a share due to unfavorable sentiment about the acquisition when the company reported negative earnings. The company faced tough times in the last couple of years as the result of the over-paid acquisition. Now, the company is pulling itself out of the darkness and it is expected to be on track again to generate value for its owners. According to my valuations, the stock of the company is undervalued and offers an upside potential of 57% to catch my target price of $41.34 a share in the next 18-to-24 month investment period.
TLRD is a leading enterprise to offer men's clothing products for special occasions, work, and everyday use. The company operates with a network of 1700 stores and the online shopping platform in the United States and the Canada. The company's brands include Men's Wearhouse, Jos. A. Bank, Moores Clothing for Men, Joseph Abboud, Twin Hill, and K&G Fashion Superstores. It also operates with Dimensions, Alexandra, and Yaffy in the United Kingdom.
The company is moving out of the danger zone slowly with better-than-expected performance in the last few quarters. According to the most recent quarterly (third quarter) results, TLRD reported diluted EPS of $0.58 as compared to a loss of $0.56 in the same period last year. The adjusted EPS was $0.68 in comparison to $0.50 in the corresponding period last year. The factors behind this performance were the new initiatives taken by the company including premium clothing, performance wear, custom clothing, and AWEAR-TECH. The company is very pleased with the improving performance, particularly the Jos. A. Bank, which is showing a turnaround from its depressed era. According to Doug Ewert's, president and CEO, comments on Jos. A. Bank:
Our Jos. A. Bank turnaround is gaining traction. We are pleased to report a better-than-expected comparable sales decline of 9.8% in the third quarter, particularly since we were up against last year's final "Buy-One-Get-Three Free" event in October. While there is still work to be done, we are encouraged by the healthier trends we are seeing at Jos. A. Bank that reflect our investments in elevating the brand and customer experience through marketing, merchandising and a more engaging sales experience."
As shown in the following graphs, the company is observing progress in revenues, earnings and cash flows. At the end of the last fiscal year, the $1.153 billion intangible assets impairment charges and increased interest expenses on the heavy leverage (the debt used to finance the acquisition of Jos. A. Bank) greatly affected the operating results of the company. The profitability dropped because of those outliers in fiscal 2015. The extraordinary charges resulting from the pricey acquisition of Jos. A. Bank greatly affected investor confidence. Therefore, the stock of the company observed a sharp decline in the year 2015. I believe the company must have had learned a lesson from that acquisition to avoid such a mistake in future.
Source: Seeking Alpha
The company has set out strategic plans to gradually improve its performance in the next few years. A few of them include innovative products to enhance customer shopping experience, improving the e-commerce shopping platform to meet the dynamic needs of this digital world, cost savings plans, and closing the unproductive stores, among others. As President of the company Ewert commented:
We are on track to achieve our targeted $50 million of cost savings in fiscal 2016. In addition, we continue to make progress on our store base rationalization initiative. During the third quarter, we closed 83 stores, including 74 Men's Wearhouse and Tux stores, bringing our total year-to-date closures to 187 stores. We expect to close approximately 63 stores in the fourth quarter for a total of approximately 250 store closures during fiscal 2016."
Additionally, the expected earnings growth looks very impressive to make the TLRD stock a wonderful value-cum-growth investment opportunity. For the next year, the earnings of the company are expected to grow just over 14% from the current earnings. For the longer time frame, the expected earnings growth of 17.50% (as compared to industry's long-term earnings growth of 14.79%) is amazing enough to make TLRD a must-have stock in your diversified portfolio.
Now is the time to look at the stock's investment perspectives in terms of valuation. Interestingly, the valuations of TLRD are much cheaper than the industry. First of all, I used the EBITDA-based valuation model (enterprise valuation model) to value the stock of the company. Based on this valuation model, the stock looks undervalued. Using the company's reported EBITDA of $349.62 million and industry EBITDA multiple of 10.84x, the enterprise value (EV) comes to $3.79 billion. Deducting the net debt from the EV brings the equity value to $2.17 billion. Dividing the total equity value with the number of shares outstanding brings the stock's intrinsic value to $44.52 per share, suggesting a significant 69.53% upside potential from the current price level.
Source: Author Calculations/Finance.yahoo
Price/earnings multiple is a widely used measure to value the stocks and to judge their investment prospects. The stock of the company looks undervalued based on P/E multiple as well. This valuation model brings the intrinsic value of the stock to $35.58, which offers a healthy upside potential of 35.50% from the current price level. The PEG ratio is the next level of P/E multiple and it makes the P/E-based picture more clear. The PEG ratio of TLRD is 0.82 as compared to the industry's PEG ratio of 1.53, which suggests that the P/E multiple of the company is undervalued as compared to its expected earnings growth potential as well as on relative value basis.
Another relative valuation multiple, the P/CF multiple, brings the intrinsic value of the stock to $43.91, which is 67% higher than the current price of the stock. Additionally, adding the forward dividend yield of 2.54% with any valuation model result makes the investment thesis more compelling.
Source: Author Calculations/Morningstar
Getting the average of all the above three valuation methods' intrinsic values, I come to the fair value of $41.34 per share, which offers a 57.41% upside potential from the current price level in the next 18 to 24 months investment horizon. Additionally, the forward annualized dividend yield of 2.54% makes this stock a good buy for the long-term diversified stocks portfolio.
Risks and Final Thoughts
TLRD stock is a good value investment opportunity. However, it does not mean that there is no risk in the company. The company is subject to various market-based risks that are prone to macroeconomic trends and changing customer preferences. In addition to these external risks, there are some internal threats that the investors should keep in mind when making investment decision. The one threat I am going to highlight here is the level of leverage the company is observing at this time. If you look at the balance sheet of the TLRD, you can see that the total liabilities of the company are $2344 million as compared to $2244 million total assets. This indicates that the company's assets are not sufficient to pay-off total liabilities if the company goes bankrupt. In that case, the shareholders of the company will be left with nothing in their shares. The total debt (total long-term debt + current portion of the long-term debt) is $1655 million, therefore, a debt-to-asset ratio of 0.74 which is a highly leveraged position. As we discussed above, the company used majority of this debt to finance the acquisition of Jos. A. Bank. The company was not much leveraged prior to that acquisition. This lone event converted the company into a highly-leveraged concern. I believe the next one to two years will be the years of transition for TLRD and the management of the company will take the debt concern at their priority to write it down to a level that is acceptable to all stakeholders of the company. Apart from this concern, the overall efforts of the company look to be good to make the stock a good investment over the long period of time. I am bullish on the long-term business prospects of the company as well as its stock. Based on all of the above analysis of TLRD, I set the target price of $41.34 for its stock for the aforementioned investment horizon.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.