Men's Wearhouse : Weak Outlook
Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Men's Wearhouse (NYSE: MW) is in a tough retail sector, but its specialty in men's clothing has given it brand-name recognition and a loyal customer base. On Mar. 15, the company announced its 4Q12 results and its decision to evaluate strategic alternatives for K&G.
Men's Wearhouse is a specialty retailer focusing on men's suits and the business of tuxedo rental in both US and Canada. As of Feb. 2, it operated 1,143 stores in the US and Canada under the brands, Men's Wearhouse, Men's Wearhouse and Tux, Moores Clothing for Men, and K&G.
The news of the hour is its decision to evaluate alternatives for one of its weaker performing units, K&G. Men's Wearhouse has begun re-evaluating its operating structure and capital-allocation program and wants to better focus on its namesake brand and Moore's men's. K&G accounts for 16% of FY12 retail segment sales and posted a 5.7% decline in its comps for FY12. This was mainly due to a poor customer response to the company's promotions and new marketing campaign. It has engaged Jefferies & Co. to assist in evaluating strategic alternatives for K&G.
Besides the decision to sell K&G, the company also announced its 4Q12 results. It reported 8% growth in revenue and a net loss of $0.07 per share in 4Q12 vs. analysts expectations of a loss of $0.05 per share on revenue of $610 million (Source:FactSet). Despite the below expectations results, the company's shares rallied 20% to $34.62 mainly due to the K&G announcement and given that its performance was better than its competitors.
The sale of K&G will definitely help the company to improve its profitability, but I would like to delve into further details checking into whether the company will make a good investment. Let us analyze the company on the following parameters:
4Q12 operating performance
The Company experienced an unprecedented volume decline in November, but the balance of the quarter improved despite facing the same macro economic challenges. For 4Q12, revenue increased 8% with 1.5% positive comps, below the company's guidance of 9.5% to 10.5%. 4Q12 gross profit was up 8% with flat margins. Selling, general and administrative expenses increased 8.3% resulting in a net loss of $3.1 million.
Sales growth has not been impressive in the last 5 years. The company posted 6% and 60% declines in revenue and net income in FY08, respectively. The company was able to come out of the recession posting a 10% increase in sales year-over-year in FY10, but again has faced weak sales growth of 4% and comps in FY12 given the slow economic recovery.
Strong balance sheet
The company has no debt and has $156 million cash on hand as well as generates positive cash flows every year. To add to the liquidity cushion, it has a $200 million credit facility with no borrowings outstanding. Further, the company plans to increase the facility to $450 million and extend it to 2018. The amended facility will also provide for a $100 million term loan, which would, if drawn, be repayable over 5 years with 10% payable annually and the remainder due at maturity.
Returns to shareholders
The company remains dedicated to returning cash to shareholders in the form of share-buybacks, and dividend payments. It recently approved a new $200 million share buy back program with $45 million remaining on the company’s previous buy back authorization.
Men's Wearhouse and Tux stores is the company's most profitable segment. It accounts for only 8% of FY12 sales, but commands an astounding 84% gross margin, more than the company's overall gross margin of 40%.
Corporate Apparel accounts for 10% of FY12 sales and posted a growth of 22% in FY12. It has finally seen profitability in FY12. Pairing up American based Twin Hills with the addition of British Dimensions and Alexandria, it continues to grow its secondary segment.
The company has moved into the corporate apparel segment in UK and Canada through its Moores line of stores. It does not have a specific plan for international growth but continues to focus on the regions as it provides opportunity for future growth.
It guided for FY2013 EPS in the range of $2.70 to $2.80 per share (representing an improvement of 5.9% to 9.8%), and sales growth of 2.85% and 3.85%. Analyst expectations were $2.77.
Men's Wearhouse faces stiff competition from various private firms like Burlington Northern Coats, BrooksBrothers, and many old-fashioned mom and pop style stores.
Its most direct public competition comes from Jos. A. Banks (NASDAQ: JOSB). Without international exposure, it is like a mini Men's Wearhouse. It continues to build its presence in the US, attempting to steal Men's Wearhouse's market share. However, the company lowered its FY12 guidance and posted a days inventory ratio of 308 and an inventory turnover ratio of 1.18. This shows that the company has a long way to reach Men's Wearhouse's metrics.
On the other hand, it has a strong contender in Macy's (NYSE: M). It reported strong 4Q12 results, increasing sales by 7.2% with SSS growth of 3.9%. It had a strong 2012 as a result of successful execution of its strategies and a 48% surge in its online sales. It also guided for a strong FY13 with EPS of $3.90 to $3.95 and SSS of 3.5% (vs. analyst expectations of $3.85).
Based on the above comparison with Jos. A. Banks, Men's Wearhouse is better given its strong balance sheet and dividend yield. Further, there is no doubt that Macy's is a much better and stable stock than Men's Wearhouse and given Men's Wearhouse's recent rally in share price, it has become more expensive than Macy's (Men's Wearhouse PE 13.63 and Macy's 12.86) .
Given its recent performance and lackluster outlook for growth, I would remain on the sideline. If you want to invest in a clothing retailer, there are better stocks in the basket.
Shas Dey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!