Tailored Brands (NYSE: TLRD) bankruptcy is the headline that is spreading wild. While it remains a claim, investors are wondering whether they should invest. Because most investors hear bankruptcy and think of the rental car company Hertz (NASDAQ: HTZ), which made some investors money. Like most insolvency cases there are always competing arguments over the future direction of the business. Thus, today’s article will provide a simple rundown of the possible bankruptcy and whether YIG sees value in an investment.
Table of contents 1. Tailored Brands and bankruptcy claims 2. Does YIG see value in an investment?
Will Tailored Brands go bankrupt?
The virus is significantly reducing household discretionary income, which is decimating Tailored Brands sales. Also, people are opting for more relaxed clothes while at home instead of pinned striped suits and custom shirts. Consequently, TLRD experienced a 60% decline in sales for Q3 of 2020FY. The company closed all of its stores for a month and a half and its online operations halted for two weeks in March. Now, if the pandemic lasted until March, TLRD’s sales situation would be less dire. However, with the world now under mandatory testing, mask-wearing, and social distancing TLRD’s chances of survival are quite low. Because according to Tailored’s management, “the retail demand will remain suppressed for the rest of 2020 and well into 2021”. However, it seems TLRD is not the only clothing retailer in trouble as the Brooks Brother, a tailor who dressed U.S. presidents, has filed for bankruptcy.
Furthermore, the possibility of bankruptcy is causing a divide amongst investors. Some believe the restructuring of the retail clothing giant is necessary and could improve the business. Because if TLRD could optimise their online platforms, and reward loyal customers with discounts, we could see their website sales outperform physical storefronts. While others believe the recessionary retail market and the recent failure to pay a $1million bond should push TLRD into bankruptcy.
Does YIG see value in a Tailored Brands investment?
Before I begin, I am obliged to remind our viewers that this is not financial advice but rather commentary from extensive research
TLRD’s shares are on discount because of the possibility of bankruptcy. Not to mention Tailored Brands is down 91% in the past year.
Investing on the dip
Some investors may be eager to invest in TLRD and ‘buy the dip’. A rebound is inevitable. Because once all the sellers have sold, all you are left with is buyers, which should drive up the price. However, the rally could last only a day or two. Not to mention for you to walk away with a gain, you will have to sell your shares to another investor who believes the stock is going up. Overall, the discounted share price might be attractive, but the odds of a successful short-term gain are low. If you think based on fundamental analysis that Tailored Brands can weather the storm then a long-term bet would be smarter. Then again, the chances of Tailored Brands emerging from the darkness are still low for now.
Shorting Tailored Brands
Considering the risks of investing on the dip, some investors might lean towards shorting Tailored Brands. Investors can short Tailored brands by buying put option contracts or selling call contracts. TLRD is down 24% in pre-market trading, indicating the bears are in full control. While shorters might predict the right direction of the stock they could get burned if annual brokerage fees are expensive. Thus, options contracts with a shorter timeframe should allow investors to mitigate hefty yearly brokerage fees. However, if you are wrong over the short-term, then the value of the option contract would decay fast. YIG does not expose the negatives of each strategy to deter investors but to provide a balanced perspective.
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The information above is not financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Patrick McLoughlin, Senior Manager of YIG.