This Stock Is Dressing Up

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It appears that The Men’s Wearhouse (NYSE: MW) has caught the attention of investors, with the stock moving up over 15% in a single day last week. Have no fear, there is still room for Men's Wearhouse to move higher; the stock is still 20% below its 52-week high. 

The run up was due to the news that shows that Men's Wearhouse has engaged Jefferies to evaluate strategic alternatives for its K&G operations. A sale of the division would be a big positive for the company, which would lead to higher profitability and a higher valuation. 

Its January-end quarterly results came in at a $0.07 loss per share, below consensus estimate of a $0.03 per share loss. This was due in part to K&G. Comps at Men's Wearhouse were up 1% year over year, but comps at K&G fell 5.7%. K&G accounts for over 15% of sales, and continues to be a big drag on the company.

Consensus is calling for company wide sales to be up 5% for fiscal year 2013 (ending January), then 4% in 2014; this despite the expected weakness in its K&G segment. Imagine what Men's Wearhouse could do without the drag of K&G.

Economic uncertainty has played its part in pressurizing all the major retailers. However, Men's Wearhouse has managed to hedge some of this slowness with new product introductions, that include its growing tuxedo rental and big-n-tall business lines (check out a SWOT on Men's Wearehouse). 

Men's Wearhouse's most formidable opponent, Jos. A. Bank Clothiers (NASDAQ: JOSB)has traded in tandem with Men's Wearhouse over the past twelve months...

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...and both also trade at 13 times earnings. However, could the recent news finally set Men's Wearhouse apart? One notable difference is that Jos. A. Bank pays no dividend, while Men's Wearhouse has a 2.1% dividend yield. There are notable reasons to be cautious concerning Jos. A. Bank, which include expectations of 20% lower 2013 income when compared to 2012. Stifel Nicolaus recently reiterated a buy on Men's Wearhouse, but cut its estimates on Jos. A Bank. This was because customers did not respond positively to Jos. A Bank's marketing and promo strategy over the holiday season. 

How are other specialty retailers doing? 

The answer is; quite well. Two notable retailers, Express (NYSE: EXPR) and ANN (NYSE: ANN)have seen major billionaire investors take sizable stakes in their companies within the past month. Billionaire Steve Cohen bought over 5% of ANN's shares (see why billionaire Steve Cohen loves Ann), and fellow billionaire Ken Griffin bought over 5% of Express (read more about why). 

Express posted EPS of $0.75 last quarter, compared to $0.68 for the same quarter last year, which was driven by 1.5% higher same-store sales, and 8% higher total sales. Express also believes that its first quarter 2013 comp sales, including e-commerce, will continue to grow in the low single digits, compared to an increase of 4% in the first quarter of 2012. 

ANN has two key segments, offering its customers (women) a more professional offering with Ann Taylor, and a more "relaxed" clothing line with LOFT. Total brand same-store sales were up 6.2% for its October-end quarter, which helped the company post EPS of $0.05, compared to the $0.04 for the same quarter last year. The company still managed to see year over year growth despite Hurricane Sandy's impact on the Northeast, and the future is bright for the company, which is expected to be driven by its mix-shift between factory and outlet channels.

Francesca's Holdings (NASDAQ: FRAN) is another specialty retailer, owning a string of retail boutiques in the U.S. Like some of the other retailers, Francesca's expects a bright future, with full year 2013 earnings expected to grow 23%-26% year over year. This comes after the company posted fourth-quarter earnings of $0.33, beating analysts' estimates of $0.30.

However, the stock could be trading a bit high from a valuation prospective. The company is now trading at 32 times earnings and 4.3 times sales, well above any of the other companies listed, or any major peer. What's more is that a number of investors believe that the stock could be overvalued, with the stock having a high level of short interest, around 45% as of the end of February (check out other reasons why Francesca's might still be a buy).

Don't be fooled

Although Men's Wearhouse has seen a nice move of late, there is still upside for the company. A big advantage for Men's Wearhouse is its initiative to return cash to shareholders. The company pays a 2.1% dividend yield, whereas none of the other stocks listed pay a dividend at all.

I believe Men's Wearhouse is a good stock to own and should trade above chief rival, Jos. A Bank, on a multiple basis. The two trade with similar price to earnings ratios, and Men's Wearhouse has a price to sales ratio that's half that of Jos A. Bank's, but Men's Wearhouse could easily trade at a premium given its better performance and strong dividend. 

Marshall Hargrave 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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