S&P Assigns 'B+' Rating to Men's Wearhouse (MW); Notes 'Fair' Business Risk Profit, 'Aggressive' Financial Risk Profile
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Standard & Poor's Ratings Services assigned its 'B+' corporate credit rating to Houston-based men's specialty apparel retailer The Men's Wearhouse Inc. (NYSE: MW) The outlook is stable. Concurrently, we assigned a 'B+' issue-level rating to the company's $1.1 billion term loan B due 2021 with a '3' recovery rating, indicating our expectation of meaningful (50%-70%) recovery in the event of a payment default. According to the company, it will use proceeds from the term loan, availability under its new $150 million revolver, junior capital, and cash on hand to fund its acquisition of Jos. A. Bank.
"The ratings on The Men's Wearhouse (TMW) incorporate our assessment of the "fair" business risk profile and "aggressive" financial risk profile. The business risk profile reflects the company's participation in the highly competitive and widely fragmented men's specialty apparel retail segment," said credit analyst David Kuntz. "We believe the company enjoys good brand recognition through its two flagship brands--The Men's Wearhouse and Jos. A. Bank (Nasdaq: JOSB). Although the company is sizable when compared with other rated specialty apparel retailers, it is much smaller than its primary competitors, which include moderate department stores such as Macy's, Kohl's, and J.C. Penney. Our assessment of business risk also incorporates our view that the company generally has a track record of relatively stable performance and a healthy store fleet. While we believe there is some potential upside as the two companies are integrated, these synergies will likely be realized starting in the second year."
The stable outlook reflects our view that performance will remain relatively flat over the next year, but that the company will use cash flow generation to reduce funded debt. Although we forecast some modest improvement in the company's credit protection measures, we believe they will remain commensurate with an "aggressive" financial risk profile over the next year. While we note that the company has successfully integrated other businesses historically, Jos. A. Bank is much larger than prior acquisitions. We believe there is some moderate degree of integration risk over the next year that could increase performance volatility.
Upside Scenario
We could raise the rating if the company is able to integrate Jos. A. Bank without substantial issues and realize synergies and performance gains ahead of our expectations. Under this scenario, revenue growth would be in the mid-single digits and margins would expand by more than 150 basis points (bps). At that time, leverage would be in the low-4.0x area, and we could revise our comparable ratings analysis to "neutral" from "negative".
Downside Scenario
We could lower the rating if the company experiences meaningful issues with regards to the acquisition that result in moderate performance erosion. Under this scenario, revenues would be modestly negative and EBITDA margins would decline more than 125 bps. At that time, leverage would be in the mid-5.0x area and we could reassess the company's financial risk profile as "highly leveraged".
"The ratings on The Men's Wearhouse (TMW) incorporate our assessment of the "fair" business risk profile and "aggressive" financial risk profile. The business risk profile reflects the company's participation in the highly competitive and widely fragmented men's specialty apparel retail segment," said credit analyst David Kuntz. "We believe the company enjoys good brand recognition through its two flagship brands--The Men's Wearhouse and Jos. A. Bank (Nasdaq: JOSB). Although the company is sizable when compared with other rated specialty apparel retailers, it is much smaller than its primary competitors, which include moderate department stores such as Macy's, Kohl's, and J.C. Penney. Our assessment of business risk also incorporates our view that the company generally has a track record of relatively stable performance and a healthy store fleet. While we believe there is some potential upside as the two companies are integrated, these synergies will likely be realized starting in the second year."
The stable outlook reflects our view that performance will remain relatively flat over the next year, but that the company will use cash flow generation to reduce funded debt. Although we forecast some modest improvement in the company's credit protection measures, we believe they will remain commensurate with an "aggressive" financial risk profile over the next year. While we note that the company has successfully integrated other businesses historically, Jos. A. Bank is much larger than prior acquisitions. We believe there is some moderate degree of integration risk over the next year that could increase performance volatility.
Upside Scenario
We could raise the rating if the company is able to integrate Jos. A. Bank without substantial issues and realize synergies and performance gains ahead of our expectations. Under this scenario, revenue growth would be in the mid-single digits and margins would expand by more than 150 basis points (bps). At that time, leverage would be in the low-4.0x area, and we could revise our comparable ratings analysis to "neutral" from "negative".
Downside Scenario
We could lower the rating if the company experiences meaningful issues with regards to the acquisition that result in moderate performance erosion. Under this scenario, revenues would be modestly negative and EBITDA margins would decline more than 125 bps. At that time, leverage would be in the mid-5.0x area and we could reassess the company's financial risk profile as "highly leveraged".
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