Moody's Investors Service revised the ratings outlook on The Men's Wearhouse, Inc. (NYSE: MW) to negative from stable, and affirmed the company's ratings including the Ba3 Corporate Family Rating, Ba3-PD Probability of Default Rating, Ba2 secured term loan rating and B2 unsecured note rating. The company's SGL-2 Speculative Grade Liquidity Rating was also affirmed.

"The outlook change to negative reflects the accelerating declines in comparable sales at Jos. A. Bank, which reported a 14.6% decline in the third quarter due to a drop in customer traffic as it began the transition away from the Buy-One-Get-Three promotional events," stated Moody's AVP-Analyst, Mike Zuccaro. "Through the first week of December, Jos. A. Bank's quarter-to-date comparable store sales declined 35.1%. Should this trend continue, the company risks missing the low end of its full year earnings guidance, which we currently expect would result in an increase in lease-adjusted debt/EBITDA to around 4.8x, up from 4.4x as of August 1, 2015."

Zuccaro added, "The declines at Jos. A. Bank are likely to continue into at least the first half of 2016, likely causing further weakening in metrics as it will take time for Jos. A. Bank rebuilding efforts to take hold and for customers adjust to the new strategies. Prolonged or accelerated declines or an inability to turn around recent weakness in the company's free cash flow could pressure the company's ratings."

Moody's took the following rating actions on Men's Wearhouse, Inc. (The):

Affirmations:

.... Corporate Family Rating, Affirmed Ba3

.... Probability of Default Rating, Affirmed Ba3-PD

.... Speculative Grade Liquidity Rating, Affirmed SGL-2

.... Senior Secured Bank Credit Facility (Local Currency) Jun 18, 2021, Affirmed Ba2(LGD3)

.... Senior Unsecured Regular Bond/Debenture (Local Currency) Jul 1, 2022, Affirmed B2(LGD5)

Outlook, Changed To Negative From Stable

RATINGS RATIONALE

Men's Wearhouse's Ba3 Corporate Family Rating reflects its meaningful scale in the men's apparel industry following the Jos. A. Bank acquisition, with 1,748 stores in North America and combined revenue of approximately $3.6 billion. While the company operates in a relatively narrow segment of the apparel industry, primarily selling suits and related products, Moody's believes that this category has less fashion risk than most segments of apparel retailing. The rating also reflects the diversification benefits of operating separate brands. While the product mix of Men's Wearhouse and Jos. A. Bank is substantially similar, each brand focuses on a different demographic. Liquidity is good, reflecting Moody's expectation that balance sheet cash, operating cash flow and revolver availability will more than cover cash flow needs over the next twelve months.

The rating is constrained by the high debt and leverage burden on the company, as well as the accelerating declines in sales at Jos. A. Bank as the transition away from the Buy-One-Get-Three promotional events resulted in higher gross margins but a decline in customer traffic and EBITDA. The ratings also reflects Moody's expectation that leverage could creep modestly higher over the next 6-12 months as the company's new strategies for Jos. A. Bank take hold, but also considers the potential for leverage declines beyond that time frame stemming from more profitable sales at Jos. A. Bank, cost savings initiatives, and potential debt reduction.

Ratings could be downgraded if the integration of Jos. A. Bank were to encounter further meaningful execution issues. In view of the high initial debt burden there is no room for financial policies to become more aggressive, such as share repurchases or acquisitions, or for free cash flow to remain weak or further deteriorate. Quantitatively ratings could be downgraded if we expected lease-adjusted debt/EBITDAR to be sustained above 5.0x for an extended period.

Ratings could be upgraded if the company demonstrates successful integration of the Jos. A. Bank acquisition which would be evidenced by improved operating margins for the combined company reflecting the achievement of a meaningful portion of its targeted synergies, and positive comparable -store sales. The company would also need to make progress reducing absolute debt levels. Quantitatively, ratings could be upgraded if lease-adjusted debt/EBITDAR falls below 4.25x and adjusted interest coverage exceeded 2.75x while maintaining a good overall liquidity profile.