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Risk-Reward With Tailored Brands

- By Jonathan Poland

Walk down Wisconsin Avenue in Washington, D.C. and the Georgetown neighborhood has plenty of fashion boutiques and bespoke tailors, all mostly empty. Of course, that's not to say the businesses aren't thriving, but with the rise of online clothing services like StichFix (SFIX) and the shifting culture of men's fashion toward business casual, the future of suit makers is in doubt.

Tailored Brands Inc. (TLRD) is squarely in the middle of the "suit culture" with brands like Men's Wearhouse, Jos A. Bank and K&G Fashion. While business has been good over the past decade as the company grew revenue from $1.9 billion to $3.2 billion and earnings from $46 million to $83 million, the market has severely punished its stock.


In the summer of 2015, the stock reach an all-time high just over $65 per share. Today, it's only a couple of points away from being a penny stock. Sellers have had a field day with shares, currently short north of 35% of the company's float. Another big negative is Tailored Brands' long-term debt, which is a full 14 times its net income; however, it still generates over $320 million in operating cash flow with actual brands that are still known and trusted.

In fact, compared to startup StichFix, which has a market capitalization above $2.6 billion and generates $48 million in net income on $1.37 billion in revenue, Tailored Brands looks like a steal priced at just $380 million. Yet while it remains profitable, the company must stop the slide in sales, which slipped about 8% to roughly $786 million during the fourth quarter. The shortfall was contributed to weakness at Men's Wearhouse and Jos. A. Bank stores, putting more pressure on its top brands.

That said, the retailer has been making strides to mobile and tailored wardrobe solutions to meet growing consumer demands as well as reducing its total debt, going a long way to remain profitable and able to pay its 72-cent dividend (9.5%) in 2019 and beyond. Custom orders account for roughly 20% of business at the company's leading stores, and is still expected to earn north of $2 per share in 2019, meaning investors can pick up stock at roughly 4 times forward earnings.

It has plenty of liquidity and with 1,400 locations, a simple marketing message and decades of experience creating well-dressed men, as long as clothing remains important, suits will still be worn and Tailored Brands will still be the leading expert and low-cost leader.

Disclosure: I am not long or short TLRD or SFIX.

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This article first appeared on GuruFocus.