Michael Burry of "The Big Short" is really upping his activism. After engaging with Gamestop (GME) recently, he has also sent a letter to the board of directors of Tailored Brands Inc. (TLRD) and on Sept. 2, he doubled down on his campaign against Tailored by filing a 13-D and increasing his position.
Burry now owns about 2.25 million shares. This amounts to 4.45% of the shares outstanding.
Burry's main concerns appear two-fold:
- Tailored's capital management.
- The decision to acquire Joseph A. Banks Inc.
Burry also specifically called out the bank debt of the company that is trading at a greater-than 10% discount to par, signifying the market isn't sure this will be paid back.
His last letter was a bit light on details, but in the new letter he was more to the point and raised more convincing arguments. For example, Burry highlighted the results of the JAB acquisition:
"On July 29, 2014 at the Tailored Brands Analyst Day, management stated, "The assumptions we've provided so far with the synergies at the low end of the range would lead us to an earnings per share of a little more than $5.50. If we achieve the high end of the synergies, which would be $150 million that would push the EPS over $6 a share.
"Speaking of synergies - during that analyst day, the word 'synergies' was mentioned 22 times. Here we are in 2019, and per NASDAQ, the analyst consensus for the year is just $1.69 per share."
Burry now specifically signals at-risk-youth about market risks.
"The return on invested capital, as well as management's record on guidance, has been very poor. Shareholders are left contemplating the returns that might have been if the JAB acquisition had never happened."
The $1.8 billion paid for this acquisition was very painful. Especially if you consider the company's current market cap of $250 million. But Burry reasoned that the company has had other bad periods and always recovered.
When your bank debt is trading below 88 cents, 40% of your stock is shorted and your stock is at 26 year lows, there is more to market sentiment than an expansion of casual Friday, and revamped sales strategies are only going to be part of the solution. The history and legacy of prior poor capital allocation decisions weigh most heavily.
Burry is getting better at highlighting through data how badly previous management failed. Next he went into the main issue that he seems to be campaigning for (emphasis mine):
"With this in mind, particular attention today should be paid to the dividend. Given the debt levels and negatively trending same store sales, the dividend should not be sacrosanct."
He also discussed the tax inefficiencies of dividends and how painful these are at the current yield.
"At $0.72 per share, the dividend amounts to about $36,373,776 annually. After taxes, most shareholders receive substantially less. For example, New Yorkers would pay a 36.5% top tax rate on those dividends. Which, on the recent $4.80 stock price, reduces the effect yield from 15% to 9.5%."
Instead, Burry wants to see aggressive buybacks.
"If funds for the dividend were instead allocated to repurchase of common stock at a recent price of $4.80, the company could retire 7,577,870 shares, which is of course equals the dividend rate of 15% of the total shares outstanding."
Burry said that if this would be repeated annually, eanrings per share would rise within three years to about $4.23 per share. But he told the board they can do even better.
"Of course, you need not wait four years to achieve such an increase in earnings per share. This all could be accelerated to the extent allowed by your lenders. The basic premise is that retiring 60% of your shares at recent prices would increase the earnings per share up to near where the common shares currently trade. This is an uncommon opportunity in the stock market."
In the final paragraph Burry summarized his suggestions:
"We recommend the Board of Directors prioritize a substantial buyback along with continued aggressive debt reduction. The dividend should be eliminated or vastly reduced in order to facilitate these more urgent and timely allocations of capital."
Meanwhile, Tailored Brands trades at a respectable 7x EV/Ebitda, but also at 1.8x free cash flow. In my previous article on this situation I wrote:
"There is also a slim chance the lump sum of the sale of the corporate apparel business will be used in buybacks. If proceeds are used in the most accretive manner, it is easier to justify the sale of the segment even at a less-than-optimal price.
"My assessment is that Burry has slight odds of big success here. His letter is not particularly aggressive or persuasive compared to a typical letter by Carl Icahn (Trades, Portfolio) or Starboard Value or a specialized activist. He's also putting forward a rather big ask because of the company's debt situation and board's general reluctance to mess with the dividend. If you ask me, this saga isn't over yet."
This letter is a much-improved one compared to his last one, and I think odds of success have gone up by quite a bit now. But it remains a big ask given the company's financial situation. We may see further letters and responses, but this looks like a good step forward.
Disclosure: No positions.
This article first appeared on GuruFocus.
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