Maybe they're bored with casual Fridays, or maybe their old threads are getting snug around the breadbasket. Whatever the reason, men are doing something they haven't done in years: They're buying suits. Between June 2002 and June 2003, the number of U.S. suit units sold increased 1 percent to 14.3 million, according to Johnson Rice & Co. equity research.
Men's Wearhouse couldn't be happier. The Houston-based company is North America's largest retailer of tailored men's clothing, accounting for an astonishing 21 percent of the suits sold in the United States each year. Its three brands — the flagship Men's Wearhouse with 505 stores; Moores, with 113 stores in Canada; and the big-box, ethnic consumer-focused K&G with 71 stores — are expected to top $1.4 billion in sales this year.
But even with such gargantuan numbers, Men's Wearhouse wants more of the market, and it's willing to make some radical alterations to get it. Paradoxically, its new approach pairs an aggressive low-price strategy with a new emphasis on formal-wear.
CEO and chief ad pitchman George Zimmer (“I guarantee it,” he says famously in television commercials, referring to customer satisfaction) started the company in 1973 with $7,000 and a mission of selling low-price suits, but in recent years the stores' range of prices had grown like a 45-year-old's waistline. Price tags could run from less than $200 for a basic private-label suit to as much as $700 for something trendier. As suit sales slowed, the high-end products were hit especially hard, and so were comp-store sales.
So, the retailer vowed last year to go back to basics. “As business got tough, we decided to pull back in that mix,” Vice Chairman David H. Edwab told Goldman Sachs' annual retailing conference in September. “We made a dramatic shift in our business.”
Higher-priced inventory was liquidated and low prices became the order of the day. A year later, the numbers show how far the company has come. About 30 percent of its suits are now priced at $200 or less compared with just 13 percent a year earlier. “What we're seeing is a lot more consumer traffic,” Edwab said, and suit volume on a comparable-store basis is up 15 percent.
Next the company turned to its suppliers. The number of vendors was reduced, and those that remained were offered more volume — but at lower unit prices. The result was a rise in margins from 35 percent to 36.5.
Then there's the tuxedo strategy.
Men's Wearhouse entered the tux business in 2000 and rented 70,000 of them that year. It expects to rent 675,000 this year and a million in 2004.
The company can buy a full tuxedo for about $160 and can rent that outfit to a groom or a high school senior for $75. Repeat the rental process 20 times (which is the average lifespan for a rented tux) and do the math. “The returns are unbelievable,” Edwab gushed to the analysts. “We see a lot of room for growth.” A major expansion of its existing tux rental distribution facility has begun at an estimated $10 million cost. According to Johnson Rice & Co. research, the new facility should be able to handle 2-3 million rentals annually, or three to five times the current level.
What's even sweeter is the company is the only national tuxedo-rental business around. The market is estimated to be worth $1.4 billion a year, and Men's Wearhouse expects to get about $50 million of that this year. The company has also added tux rentals to its Moore's stores in Canada. Some 48 stores began renting tuxes last month, and the rollout to the remaining Moore's stores is expected to be completed by January 2004.
The tuxedo business offers still another opportunity. JP Morgan analyst Brian Tunick notes that 700,000 rentals translate into 2.1 million store visits as customers pick out, pick up and drop off their tuxes. With more exposure, the retailer's sales team can wheel out more suits. To make sure, the company has implemented a new commision structure for its sales associates to offer incentive for converting tux rental customers into Men's Wearhouse clothing customers.
“We believe that in the coming years, Men's Wearhouse will continue to take market share from department stores, regional chains and both local and national specialty stores, since we do not think the competition — which has become more and more cost and return focused — is geared to provide men with the service and selection they require,” Tunick writes in a recent research report.
(Investors seem to agree that Men's Wearhouse has hit on a winning approach. Since last October, its shares have tripled to nearly $30. First-half sales rose 5.7 percent to $647 million, with U.S. comp-store sales up 4.5 percent, and earnings jumped 23 percent to $22.5 million.)
|Source: Company reports & J.P. Morgan estimates|
Despite its emphasis on price, Men's Wearhouse customers are relatively affluent. The household income of the average customer — who is 46 years old — is $71,000, and 21 percent of its customers make more than $100,000 a year.
To accommodate the growing tux business, stores are being expanded as their leases come up. Other changes are coming too. Last year the company acquired the Wilke-Rodriguez label, along with the design services of founder Eddie Rodriguez, who will update the look of Men's Wearhouse stores.
And new stores are in the works as well. After the Chapter 11 filing of Today's Man, the New Jersey-based owner of 24 men's outlets in the Mid-Atlantic region, Men's Wearhouse acquired five of its stores in the Greater New York-New Jersey area. This fall they will be reopened as K&G stores, with a sixth regional store added to the mix. Those moves reflect the company's desire to improve its store clustering in metropolitan areas, JP Morgan's Tunick notes.
Across its brands, Men's Wearhouse prefers highly visible locations in metro areas, says Tom Jennings, the company's senior vice president for real estate. “Our goal is to make our stores very easy for men to shop in, and that often dictates that they be easy to get in and out of,” Jennings says. “It's not that we avoid malls — in fact 15 percent of our stores are in malls. They're just not our preferred locations.”
Men's Wearhouse itself “is a pretty mature chain” that's in every major U.S. market, Jennings says, adding that expansion will come through infill as the company moves into smaller markets with MSAs of 150,000 or so. The company is testing a smaller-store concept of 3,500 to 4,000 sq. ft., one of which just opened in Macon, Ga.; Jennings expects five more of the smaller but fully equipped stores to open this year.
But Men's Wearhouse will also focus on the women's market. The chain closed five Southern California K&G stores that were too small to accommodate a full women's line. The closings also reflected a desire to focus growth on the Eastern seaboard.
But with a healthy track record, Men's Wearhouse has proven to be a major player in menswear. “Now that we have a much better blend of high-priced and low-priced suits, that's given us a better balance with our customers,” Jennings says.
Edwab predicts steam in the suit market for at least a year, perhaps a year and a half. What happens will depend greatly on the strength of the economy.
“You've got to remember men are the first ones to stop spending when they feel the economy is a little tough, particularly for clothing,” Edwab says.
For a while, men weren't buying suits — a big problem for Men's Wearhouse, the nation's biggest purveyor of tailored men's clothing. Even worse, the chain had moved into higher-priced suits, which collected dust in the stores.
The company went back to its value-retailing roots by eliminating expensive suits and moving to lower price points. At the same time, it began to exploit another opportunity by renting tuxedos, a business estimated to be worth $1.4 billion annually.
Men's Wearhouse is back in fashion. Its stock has tripled in a year, customer traffic is up, and tux rentals will pull in $50 million this year.
The company now owns 21 percent of the U.S. suit business; some 30 percent of its suit sales are priced at $200 or less, up from 13 percent last year. Margins, meanwhile, have risen from 35 percent to 36.5. And Men's Wearhouse expects to rent one million tuxedos next year.