Get a Bargain on Men's Wearhouse Stock
Men's Wearhouse stockholders must feel like a customer who, after years of wearing a 38-long suit, suddenly measures in at a chunky 54 short. The stock (symbol MW), which hit a record $56.24 in July, closed at $42.10 on October 31.
The plunge since summer is partly because of bad news, but the main culprit is a fun-house-mirror effect that makes the company look worse than it really is -- and may make the stock, at current levels, a fine fit for your portfolio.
Blame the company for creating high expectations. It has topped analysts' earnings estimates for four straight quarters, but that streak will apparently come to an end in the current period, which ends November 3. Early in October, Men's Wearhouse, which runs 1,267 stores in North America, announced that earnings this quarter would come in at 70 cents a share, compared with the 70 to 73 cents it had estimated earlier.
The reason for the modest decrease is softening sales at the company's lower-end K&G stores and some financial indigestion from the acquisition last April of the After Hours tuxedo-rental chain.
Wall Street hates such surprises, especially on the heels of pleasant ones, and is quick to punish the perpetrator. "The market is all about overreaction," as Richard Jaffe, an analyst with Stifel Nicolaus who follows the company, puts it. The problem at After Hours has been "priced into the stock, and then some," he says.
The softening of the economy will affect apparel sales, Jaffe concedes. Same-store sales (sales at stores open for at least a year) may actually drop for a couple quarters, he says, although he argues that the market has overreacted to that prospect, too.
By his reckoning, the nicer merchandise at Men's Wearhouse stores is tied to employment and wage trends, which should stay steady. However the fortunes of K&G customers are tied more closely to rising energy and housing costs. On the plus side, Jaffe sees younger men buying more suits, dress slacks and shirts.
Some other big trends are working in Men's Wearhouse's favor. Analyst Scott Miller of Thompson, Siegel & Walmsley says the closing of 80 May department stores puts about "$200 million in men's apparel market share up for grabs."
Plus, he says, department stores are devoting less square footage to men's apparel because those threads tend to turn over a lot less than other kinds of goods. Says Miller: "Men tend to operate a lot differently than women. Men come into store like Men's Wearhouse once a year and buy a couple suits and six or seven shirts."
The company's bread and butter business -- nice, classically cut, well priced suits -- will
be among the last clothing segments to be hurt by a weak economy, Miller says. Luxury retailers such as Nordstrom (JWN), Saks (SKS) and Coach (COH) will suffer first and already are showing signs of weakness.
The big ace at Men's Wearhouse may be up a tuxedo sleeve. Both Jaffe and Miller say that the After Hours acquisition will add to profits and make them more consistent. One reason for that is that while suits aren't big sellers in the spring, there is a lot of demand that time of the year for tuxedo rentals for proms and weddings.
Even before it bought After Hours, which has 507 stores, Men's Wearhouse was renting 1 million tuxes a year. The company now has about 35% of the north American tuxedo rental business. The gross profit margin (sales minus cost of sales, divided by sales) on rentals is about 80%, compared with 55% for Men's Wearhouse's other business, Miller says.
Meanwhile, the stock looks like a bargain. It sells at 14 times the $2.98 per share that analysts expect the company to earn in the fiscal year that ends next January and 12 times the $3.41 they expect for the year that ends January 2009. Buying the shares at these levels is almost like buying a suit and getting a second pair of pants for free.