Jos. A. Bank shouldn’t expect similar, short-term performance from its rental expansion. The Men’s Wearhouse, Inc. (NYSE:MW) claims agreements and partnerships with David’s Bridal, TheKnot.com, and other wedding-focused businesses that provide a steady stream of referrals. But there is long-term promise in a rental business seeing as the gross margins are unbelievably thick.
In 2012, the rental business added $349.88 million in gross profits to The Men’s Wearhouse, Inc. (NYSE:MW). Given its much higher inventory turnover ratio, we can assume that The Men’s Wearhouse, Inc. (NYSE:MW) manages to rent each tuxedo in inventory multiple times per year.
The Men’s Wearhouse, Inc. (NYSE:MW) rents tuxedos from retail locations in which it also offers men’s clothing for sale. If Jos. A. Bank were to tap into rentals and build out the business through its existing operations, it could reach into a piggy bank worth millions of dollars per year with minimal cash outlay of its own.
Making the case for Jos. A. Bank
Let’s suppose that Jos. A. Bank can enter the rental market and make a similar amount of gross profits from tuxedo rentals as its nearest competitor. Jos. A. Bank is roughly half the size of The Men’s Wearhouse, Inc. (NYSE:MW) by store count. At 53% of the size of The Men’s Wearhouse, Inc. (NYSE:MW), Jos. A Bank could deliver $185 million in additional gross profits with rentals each year.
This could add as much as $120 million to the bottom-line, sending net income up 150%.
Even in a worst case, where Jos. A. Bank spends heavily to promote its new rental service and devours much of its new gross margin contribution in competitive investments, Jos. A Bank could still double net earnings on a tuxedo rental expansion. Given the scale of the retailer’s marketing budget, a brief blurb about rentals could be added to existing marketing spend, making marginal marketing costs negligible.
I think that makes Jos. A. Bank worth owning. At 16 times trailing earnings, a double in earnings means Jos. A. Bank trades at 8 times earnings if it fully maximizes the potential in a rental product. The existing cash on the balance sheet of $377 million (one-third of the company’s total equity valuation) is more than ample to roll out a rental service without compromising liquidity.
Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Jordan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Why I Like This Company’s Expansion Plans originally appeared on Fool.com is written by Jordan Wathen.
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