Positive Near Term Catalyst for This Men's Retailer

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Since the beginning of Mar 2012, The Men’s Wearhouse (NYSE: MW) has experienced a significant jump of more than 20%, from $27.88 per share to nearly $33.50 per share. The positive share movement was due to its narrow fourth quarter loss and its planned sale of its weak performing unit, K&G clothing. Barron’s commented that investors should stay as the stock could trade higher if the K&G deal is consummated. Is Men’s Wearhouse a buy at its current price? Let’s find out.

Business snapshot

The Men’s Wearhouse, founded in 1973, is one of the largest specialty retailers of men’s suits and the biggest tuxedo rental product provider in the U.S. and Canada, operating under several brand names such as Men’s Wearhouse (638 stores), K&G (97 stores), Men’s Wearhouse and Tux (288 stores) and Moores (120 stores). The majority of its sales, $1.69 billion, or 68% of its total sales, were generated from the retail-clothing product. Tuxedo rental services ranked second with $406.5 million in revenue, accounting for 16.3% of the total 2012 sales. In 2012, while Men’s Wearhouse and Moores experienced positive comparable store sales growth of 4.8% and 1.5%, respectively, the comparable store sales of K&G declined by 4.3%.

Positive near-term catalyst

In the fourth quarter of 2012, while its net sales increased 8.2% to $608.4 million, it narrowed its loss from $3.8 million in Q4 2011 to a loss of $3.4 million in Q4 2012. For the full year, net earnings actually rose, from $120.45 million, or $2.30 per share in 2011 to $132 million, or $2.55 per share in 2012. What makes the market interested might be its engagement of Jefferies & Co. to help the company “evaluating strategic alternatives for K&G operations.” By shedding K&G, the company might report lower revenue but a much better net income. In addition, the company would also have a much stronger balance sheet with more cash on hands, allowing it to further expand its core and profitable growing stores.

Furthermore, Men’s Wearhouse announced its share repurchase program of around $200 million, which is equivalent to an 11.8% yield. Investors might feel quite safe with Men’s Wearhouse due to its conservative balance sheet. As of February 2012, it had $1.1 billion in total stockholders’ equity, $156 million in cash and no debt.

Peer comparison

At around $33.5 per share, Men’s Wearhouse is worth around $1.7 billion on the market. The market values Men’s Wearhouse at only 5.5 times EV/EBITDA. Compared to its peers including Jos. A. Bank Clothiers (NASDAQ: JOSB) and TJX Companies (NYSE: TJX), Men’s Wearhouse is considered to be reasonably valued. Jos. A. Bank is trading at around $41 per share, with a total market cap of around $1.1 billion. It has a bit cheaper valuation at only 5.08 times EV/EBITDA. TJX is the biggest company and has the most expensive valuation among the three. At $45 per share, TJX has a total market cap of around $33.25 billion on the market. It is valued at 8.82 times EV/EBITDA.

Among the three, Jos. A. Bank is the most profitable company with the highest operating margin of 14.85% while the operating margin of TJX is only 12%. Men’s Wearhouse is the least profitable, generating only 8% operating margin. Interestingly, TJX generated the highest return on invested capital of 42.6% while the return on invested capital of Jos. A. Bank and Men’s Wearhouse were only 16.2% and 12.19%.

My Foolish take

Men’s Wearhouse, after shedding its K&G stores, will definitely rise due to its stronger balance sheet, more profitability and more growth expansion. Investors could invest long term in both Jos. A. Bank and TJX as they are much better run retailers with higher margin and return on invested capital.

Anh HOANG 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!

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