S&P Downgrades Men's Wearhouse (MW) to 'B'; Notes Significant Underperformance at Jos. A. Bank

Standard & Poor's Ratings Services today lowered its corporate credit rating to 'B' from 'B+' on Men’s Wearhouse Inc. The outlook is stable.

At the same time, we lowered the issue-level rating on the term loan to 'B+' from 'BB-' and the issue-level rating on the unsecured notes to 'CCC+' from 'B-'. The '2' recovery rating on the term loan and '6' recovery rating on the unsecured notes remain unchanged, indicating our expectation of recovery on the high end of the 70%-90% range and 0%-10% range, respectively.

"The rating action reflects significant underperformance at Jos. A. Bank and our view that a turnaround of the brand is unlikely in the near-term and will be a gradual process. Jos. A Bank, which comprises about 25% of the company’s revenue base, has started to move away from its well-known promotions emphasizing bulk purchases, to less aggressive promotions--a strategy that has so far not been resonating well with consumers. Same-store sales at Jos. A. Bank have been deteriorating at an accelerated rate over the past several quarters, and we expect weak sales trends to continue over the next 12 months as the negative traffic trends at Jos. A. Bank show no signs of moderating," said credit analyst Andrew Bove. "Jos. A Bank will also aim to broaden its customer base by introducing new merchandise targeted toward a younger demographic. However, we believe the process will be gradual and we do not expect the company to realize meaningful benefits from this over the next year."

The stable outlook reflects our view that although we forecast the negative same-store sales trends at Jos. A Bank to continue over the next 12 months, we expect continued good performance from the remainder of the Men’s Wearhouse businesses to partly offset that trend and liquidity will remain adequate with positive free operating cash flow.

We could lower the ratings if the sales decline at Jos. A. Bank becomes more severe and extends further than our base-case expectation, coupled with weakening operating performance at the company’s legacy brands. This could be a result of Jos. A Bank losing its core customer from its change in pricing strategy on a more permanent basis, along with increased competition from department stores and off-price retailers further pressuring traffic and margins at all brands. Under this scenario, revenues would decrease in the low-single digits in 2016 and gross margin would be 50 bps below our base-case forecast, resulting in negative free operating cash flow. At that time, leverage would be in the high-6.0x area and EBITDA interest coverage would be in the mid-2.0x area. Weakening performance at legacy brands could also cause us to revise down our assessment of the business, resulting in a lower rating.

Although unlikely, we could raise the ratings if the company is able to turn around negative operating trends at Jos. A. Bank much faster than expected while experiencing continued good performance at the legacy brands. Under this scenario, revenue growth in 2016 would be in the mid-single digits and margins would expand by an additional 50 bps over our base-case forecast. At that time, leverage would be approaching 5.0x area, and we could revise our assessment of financial risk higher as a result of improved credit metrics.

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