Is it Time to Suit Up with this Retailer?
Leo 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) can be a frustrating enigma. Its price movements are often erratic, yet it has risen more than 60% over the past five years, and 250% over the past decade. Recently, the Houston-based company posted top and bottom line growth that both missed analyst estimates, topped off with utterly mediocre same-store sales growth.
Yet the stock rallied nearly 20% on news of a possible sale of its K&G brand along with a big stock buyback. Was this surge of optimism justified? Let’s break down the numbers and see if investors are getting a bit ahead of themselves.
For its fourth quarter, Men’s Wearhouse reported a loss of $3.4 million, or $0.07 per share, a slight improvement for a loss of $3.8 million, or $0.07 per share, in the prior year quarter. That missed the Thomson Reuters average analyst estimate for a loss of $0.05, and also came in two cents short of the low-end of the company’s prior guidance.
Meanwhile, revenue rose 8.2% to $608.4 million, also missing the forecast of $610.0 million. CEO Doug Ewert attributed the decline to an “unprecedented volume decline in November,” and “challenging” macroeconomic conditions.
However, the company sees a more profitable year ahead. The company expects to earn $2.70 to $2.80 per share for 2013, in line with the analyst estimate of $2.77 per share, representing a year-on-year profit increase of 5.9% to 9.8%. Sales are expected to rise 2.85% to 3.85%.
Men's Wearhouse operates three main stores: Men’s Wearhouse, Moore’s, and K&G. Both Men’s Wearhouse and Moore’s offer casual to formal wear for men, while K&G is geared toward men, women and children.
Men’s Wearhouse is by far the company’s largest brand, with 638 namesake stores and 288 Men’s Wearhouse and Tux stores featuring higher-end, limited suit and tuxedo collections. The company finished the quarter with a total of 1,143 stores.
Same-store sales were weak at all three brands, improving 1% at its namesake brand while declining 5% and 5.7% at Moore’s and K&G, respectively. Men’s Wearhouse’ sales were driven by its classic promotions, such as “buy one suit, get one for $100.”
While those numbers look weak, they actually represent a slow turnaround for the company, which has seen single-digit revenue improvements in recent quarters, thanks to a renewed interest in men’s apparel boosted by a strengthening U.S. economy. A new focus on slimmer, tighter-fitting suits for young men has also generated fresh sales.
During the quarter, the company's retail sales rose 6.8%, while its corporate apparel sales grew by 21.5%.
Goodbye, women and children!
Generally, weak revenue growth, an unprofitable bottom line, and bleak same-store sales don’t cause a stock to rally 20%, as the stock did on March 14.
That surge was mainly caused by the company’s statement that it was evaluating “strategic options” for its lagging K&G brand, which generated roughly 13% of the company’s 2012 revenue with its 97 stores.
K&G is an off-price retailer, which sells discontinued brand name products at steep discounts. This is similar to the strategy employed by Ross Stores (NASDAQ: ROST) and The TJX Companies (NYSE: TJX), which owns Marshalls and TJ Maxx.
However, as reflected by recent earnings reports from those two retailers, the payroll tax hike and delayed tax returns are slowing down sales to the core demographic of off-price retailers - the middle class.
Ewert acknowledged that the company’s strength primarily comes from its namesake stores and Moore’s - in other words, menswear - and not K&G’s apparel for women and children. Ewert said that sales at K&G were disappointing, with customers not responding to promotions and new marketing campaigns.
Therefore, the company has hired Jefferies & Co. to assist in exploring options for K&G, which could either be spun off or sold.
But who would buy K&G?
At this point, the stock’s price action indicates that Men’s Wearhouse investors are hoping for a buyout, and not a spinoff. But who would seriously want to buy a lagging off-price retailer with negative same-store sales growth? Worse yet, Men’s Wearhouse expects sales at K&G to continue declining 3% to 4% in fiscal 2013.
Fellow off-price retailers Ross and TJX could possibly purchase K&G, since the business could be horizontally integrated for some cost-saving synergies, if executed properly. Ross, which intends to double its store count to 2,500 stores by the end of the decade, might be able to pick up those 97 stores at a discount and re-brand them. I also believe private equity firms, such as Bain Capital - which owns Burlington Coat Factory - might express interest in K&G.
Regardless of its fate, analysts are upbeat regarding a sale of the K&G business. Cowen and Company analyst John Kernan sees “a one-time dividend or share repurchases” on the horizon if the deal goes through.
Speaking of share repurchases, Men’s Wearhouse also stated that its board approved a new share-repurchase program of $200 million, on top of the $45 million still available from its previous share buyback.
Men’s Wearhouse only has one direct publicly traded competitor in the United States - Jos. A. Bank Clothiers (NASDAQ: JOSB), which also offers menswear, tailored suits and tuxedos in approximately 556 stores. How do these two companies stack up against each other fundamentally?
|Forward P/E||5-year PEG||Price to Sales (ttm)||Return on Equity (ttm)||Debt to Equity||Operating Margin||Profit Margin|
|Jos. A. Bank||13.50||1.13||1.13||16.20%||No debt||14.85%||9.17%|
|Men’s Wearhouse||11.46||1.26||0.61||12.34%||No debt||7.98%||5.29%|
|Advantage||Men’s Wearhouse||Jos. A. Bank||Men’s Wearhouse||Jos. A. Bank||Even||Jos. A. Bank||Jos. A. Bank|
From these metrics, it’s easy to see Men’s Wearhouse's reason to sell K&G. Since Jos. A. Bank focuses entirely on menswear, it enjoys higher margins and stronger sales.
Since 2010, Jos. A. Bank also introduced its tuxedo rental business through a partnership with Jim’s Formalwear - one of the biggest domestic wholesale distributors of men’s formalwear - to compete with Men’s Wearhouse’s tuxedo rental business.
Jos. A. Bank's stronger focus on growing in its core business is well reflected in its top and bottom line growth over the past five years.
The Foolish Bottom Line
I don’t see any convincing reasons to follow the herd and buy Men’s Wearhouse right now. Weak same-store sales across all brands, a sale of a non-performing brand that is still in the early stages, and inferior margins to its closest competitor aren't qualities of a strong investment.
I also think that the company’s optimistic projections for 2013 are a bit high, and investors could be sorely disappointed. Therefore, my apologies, Mr. Zimmer, but I simply “don't like the way it looks.”
Leo Sun 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!