Men's Wearhouse is Dressed For Success

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

One of the simplest ways to get an overview of a company's operations is through a SWOT analysis.  Here, the main strengths, weaknesses, opportunities, and threats of the company are laid out for all to see.  Men's Wearhouse (NYSE: MW) has faced a 25% drop in its share price due to a trio of guidance cuts, a downgrade from Cowen, and the impact of its most direct competitor, Jos. A. Bank Clothiers (NASDAQ: JOSB).  Posting short-notice guidance of a 20% decrease in 2012 profits, Jos. A. Bank was slammed with a 17% drop in share price.  

With Men's Wearhouse also expecting a 20% plunge in yearly profits, I have decided to take an inside look at the company's operations to see if its current price offers a long-term investment opportunity for Fools everywhere.

Strengths

Men's Wearhouse and Tux stores- Making up 20% of the company's sales, tuxedo rental services has become one of Men's Wearhouse's most profitable operations.  Commanding an 86.8% gross margin, the tux rental business is more that 40% higher than the company's overall gross margin. 

Strong Financials- Holding $138 million cash on hand versus no debt, while generating a positive free cash flow every year for the last decade, Men's Wearhouse is built upon a solid foundation.  Growing its Book Value per share 10% yearly for the last decade, the company has lowered its P/B to only 1.3.

Slow and Steady Wins the Race- Growth has not been impressive, but it has been very steady, with EPS improving 14% yearly over the last 10 years and 18% since 2008.  As for revenue, the company has seen an 8% yearly climb over the last decade, and a 4% bump up per year in the last 5 years.

Great Work Environment- Coming in 50th out of the Forbes 100 Best Companies to Work For, Men's Wearhouse shows that it truly cares about its employees.  With compensation and benefits well above the norm for retail, the company has attracted top talent and spurred cost savings initiatives throughout its company.  As the Motley Fool's own Jeremy Bowman explains, looking for happy employees can be a huge help when try to find successful stocks.

Weaknesses

Slowing Growth Runways- Aiming for a target of 125 Moores stores in Canada, the company doesn't have much room for growth as they currently have 117 now.  Furthermore, the company has 625 Men's Wearhouse stores and sees the overall count in America growing to 750 in the intermediate future.  While that represents a 20% jump, it is not a wild growth runway by any means.  

Struggling Metrics- In the trailing 12 months, Men's Wearhouse has seen its Days Sales of Inventory jump from 145 to 167 and its Inventory Turnover drop from 2.52 to 2.18.  Long story short, this is largely due to the company's increase in inventory, as it now makes up 41% of total assets.  With Days Inventory historically closer to 150 and Inventory Turnover around 2.5 on average, it will be pivotal for the company to continue clearing its excess inventory.

Opportunities

Corporate Apparel- Having posted an 18% increase in sales during 2010 and finally finding profitability in the first 9 months of 2012, the company's Corporate Apparel segment has begun to produce.  Pairing up American based Twin Hills with the addition of British Dimensions and Alexandria, Men's Wearhouse continues to grow its secondary segment, which now accounts for 9% of overall sales.

International Expansion- Through its Moores line of stores, the company has successfully moved into the Canadian retail space in addition to its corporate apparel segment in the U.K.  While they do not have an immediate plan for further international growth, the company's sales in the U.K. and Canada offer the opportunity for further growth in their respective geographies, particularly with Europe, as it is the largest clothing retail industry in the world.

Acquisitions- With a history of smart acquisitions and a debt free balance, there is always an opportunity for Men's Wearhouse to find another great company at a reasonable price.  From Alexandria to Dimensions, or After Hours Formalwear to Moore's, Men's Wearhouse is willing to buy reasonably priced growth.

Threats

Jos. A. Bank- Representing the company's most direct line of competition, Jos. A. Bank can almost be seen as a mini Men's Wearhouse.  With no international operations, Jos. A. Bank is looking to continue building its U.S. presence, which means attempting to steal market share from Men's Wearhouse.  However, lowering its full year 2012 profit guidance, Jos. A. Bank has shown that expanding an additional 150 stores from its current total of 500 could be harder than expected.  Posting a Days Inventory ratio of 308 and an Inventory Turnover ratio of 1.18, the up and coming retailer has a long ways to go to reach Men's Wearhouse and its strong metrics.

Macy's (NYSE: M)Posting strong 4th quarter results, Macy's welcomed in its new fiscal year by growing its Omnichannel operations and delivering 48% sales growth year-over-year with its online sales.  By focusing on its Omnichannel operations, the company aims to fulfill orders online from any of its current stores, giving it quite a leg up on its peripheral competitors in Men's Wearhouse and Jos. A. Bank.  Despite this success, however, Macy's inventory levels have jumped at an alarming rate, up from 23% of total assets last year to 32% this year.

Rough Retail Competition- As mentioned, Jos. A. Bank offers the company's most direct public competition, but Men's Wearhouse also faces stiff competition from private firms in Burlington Northern Coats, Brooks Brothers, and many old-fashioned mom and pop style stores.  Pair that up with peripheral competition from Macy's and J.C. Penney with its new CEO Ron Johnson, and this American retailing niche could prove treacherous.

Valuations

<table> <tbody> <tr> <td>Company</td> <td>P/E & Forward P/E</td> <td>P/FCF</td> <td>P/B</td> <td>10 yr Rev Growth</td> <td>10 yr EPS Growth</td> <td>Cash/Debt</td> <td>Dividend</td> <td> Graham #</td> </tr> <tr> <td>Men's Wearhouse</td> <td> 11/10</td> <td> 8</td> <td>1.3</td> <td> 8%</td> <td> 14%</td> <td> $138M/0</td> <td> 2.6%</td> <td> $34.56</td> </tr> <tr> <td>Jos. A. Bank</td> <td> 12/13</td> <td> 9</td> <td> 1.8</td> <td> 13%</td> <td> 18%</td> <td> $275M/0</td> <td> NA</td> <td> $41.85</td> </tr> <tr> <td>Macy's</td> <td> 12/10</td> <td> 7</td> <td> 2.8</td> <td> 6%</td> <td> 6%</td> <td> $1.3B/6.9B</td> <td> 2.1%</td> <td> <p> $32.22</p> </td> </tr> </tbody> </table>

While the numbers here are somewhat similar, Men's Wearhouse has 3 specific numbers that give it an edge over its competitors.

  1. No Debt- Jos. A. Bank also has no debt -- and even has more cash on hand -- but it doesn't have a dividend, which brings me to my next point.
  2. A Dividend- Coming in at a 2.6% yield, Men's Wearhouse offers a high quality dividend that has doubled over the last year and has been paid out for the last 7.
  3. Graham Number- While it hasn't made dividend payments long enough to technically qualify as an Intelligent Investor pick by Ben Graham, it does trade at a 20% discount to its Graham Number.

All in all, with its cheap valuation, discount to Graham Number, gracious dividend, and steady success, I see Men's Wearhouse as one of the most consistent clothing retailers out there.  At these prices I believe it is worth an investment and will give it a green thumb on CAPS.


joryko 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!

blog comments powered by Disqus