Suit retailer Jos. A Bank has been struggling to dodge a hostile bid from rival Men's Wearhouse. The company's latest defense plan: Throw on some extra layers from Eddie Bauer.
Friday morning, Jos. A Bank surprised its suitor with a deal to purchase the casual and outdoor apparel retailer for about $825 million. The deal also also includes a partial share repurchase at $65 a share, well above the market price of $54 and the Men's Wearhouse offer of $57.50. The moves to bulk up and buy expensive shares both look designed to fend off Men's Warehouse.
But behind all the brinksmanship, the company is attempting to deliver on a recovery story with two brands that have both seen better days. If it is successful, the stock could be worth far than the offer from Men's Wearhouse. But that will require both the suits business and Eddie Bauer to get back on track in a hurry.
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First, take Eddie Bauer. Private equity firm Golden Gate purchased the company out of bankruptcy in 2009 and has tried to restore it by focusing on outerwear, which should insulate it from a shift in trends for casual shirts and pants. The company has also shuttered many of its large, under-performing stores and focused on a smaller footprint.
The results have begun to pay off, according to Jos. A Bank CEO Neal Black. "The brand is getting back up into the Patagonia and Orvis kind of space and not focused on casual," Black said in an interview with CNBC Digital. Indeed, the company's same-store sales rose 15 percent in the November-December period compared with a year earlier, a strong performance in a weak holiday season.
Black also said there is "huge upside" in the number of potential Eddie Bauer locations. The outerwear company currently has about 200 full-line stores, compared with roughly 700 for Jos. A Bank.
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Eddie Bauer will need to pick up steam right away. In 2014, the combined company is expected to earn between $255 and $265 of earnings before interest, taxes, depreciation, and amortization. Black said the Jos. A Bank business should contribute about $180 million. But Eddie Bauer only generated around $63 million of ebitda last year, indicating it needs another $10 million to $20 million to bridge the gap.
2015 will be even tougher. The combined company's 2015 target of $325 million to $340 million includes a $25 million boost from cost savings, but both brands will need to perform according to plan to reach the total.
All this comes as Jos. A Bank is trying to restore its key business and resist the temptation to discount. Analysts estimate the company's 2013 ebitda was $145 million, down from a peak of $185 million in 2011. While the company has about 100 more stores now than in 2011, the retail environment has been highly competitive in the early weeks of 2014.
And there is no sign that Men's Wearhouse will be any less aggressive this year. It has adopted brand-name designers and uses many promotions that are virtually identical to Jos. A Bank. That means any growth in margins for Jos. A Bank will depend on superior merchandising.
Jos. A Bank trades at 18.8 times forward earnings, suggesting investors are already counting on significant growth in the next couple of years. With nearly perfect performances needed from both Jos. A Bank and Eddie Bauer, the stock could go out of fashion in a hurry.
—By CNBC's John Jannarone; follow him on Twitter @jannarone