Hedge fund managers stake their reputations — and their returns — on picking winners and losers, but some stocks create harsh divisions. Tailored Brands is one of them. The Fremont, California–based clothing company, formerly Men’s Wearhouse, was created in January as part of a turnaround bet by its management following its ill-fated acquisition of rival Jos. A. Bank — a deal that had the vocal support of at least one hedge fund manager, Ricky Sandler. His firm, Eminence Capital, owns nearly 13 percent of Tailored Brands. Other hedge fund firms that hold shares include Armistice Capital — whose CIO, Steven Boyd, recently told CNBC that he likes the company as a turnaround opportunity —D.E. Shaw Group and Millennium Management.
The critics include Glenview Capital Management’s Larry Robbins, who used his first-quarter shareholder letter to call out Tailored Brands alongside rental car companies Hertz and Avis as examples of consumer names that might be beyond saving. “The decline in these stocks, several of which appear to represent a permanent impairment in value versus prior expectations, have created fear, uncertainty and doubt not only about these names but about the capability and viability of their hedge fund owners,” Robbins wrote.
Tailored Brands began trading on February 1 on the New York Stock Exchange under the symbol TLRD. Men’s Wearhouse shareholders were allowed to move over to the new holding company — whose brands include Joseph Abboud, K&G Fashion Superstores and Moores Clothing for Men — on a one-to-one share basis. The holding structure is intended to shield the company’s better-performing brands while it works to clean up losses from the takeover of Jos A. Bank. Men’s Wearhouse bought its rival in 2014 for $1.8 billion and has dealt with steady losses, which continue under Tailored Brands. For the quarter ended January 30, 2016, Jos. A. Bank sales fell 32 percent, which netted out to an overall sales decline of 11 percent for Tailored Brands as a whole. The company was able to mitigate the losses from Jos A. Bank with sales gains in its other brands, and although that’s keeping a bad situation from turning dire, hedge funds are divided on whether the turnaround will be successful.
Nikki Baird, Colorado-based managing partner at Retail Systems Research, says part of the problem for Tailored is the deep discounts Jos. A. Bank customers have become accustomed to. Once the company stopped offering promotions like its “buy one, get two suits free” deal, sales flatlined.
In March, Tailored Brands announced it would be closing 140 to 150 Jos. A. Banks stores. Still, few retailers have been able to recover from the damaging deep-discount model, and the company may have to depend on its more profitable brand names to stay afloat. Recent retail bankruptcies that were exacerbated by deep discounts include American Apparel and Wet Seal.
For Tailored Brands the key to recovery will be appealing to Millennials, and that may require an overhaul of the customer experience at all its businesses, both stores and online, Baird says. Upstart online brands like Combatant Gentlemen and Bonobos “seem to be turning the whole business model upside down,” she adds.
