After the market close Wednesday afternoon, Men's Wearhouse (MW) reported relatively uneventful fourth quarter results that were overshadowed by the company's strategy change. After announcing the appointment of John Kimmins to chief financial officer last week, the company unveiled that it hired Jefferies to evaluate strategic alternatives for its K&G unit (potentially a sale), which has struggled immensely. Instead, the company will focus on Men's Wearhouse and Moore's. The company also added $155 million to its share repurchase authorization, giving the company the ability to repurchase $200 million shares. On top of share repurchases, the company announced it is amending its current credit facility to a borrowing capacity of $300 million with the capacity to borrow $450 million, and adding a $100 million term loan payable quarterly over five years with an interest rate of 10%. Kimmins must have been busy.
As for K&G, we believe market participants think the company is signaling it will sell the business (shares were up sharply in after-hours trading), but we aren't sure if that's the right reaction. K&G posted a same-store sales decline of 5.7% in the fourth quarter of 2012 on top of a 2.7% decline in the fourth quarter of 2011. For the full-year, sales fell 2.4% year-over-year to $366 million as same-store sales dipped 4.3%. Assuming it has gross lower margins than the rest of the company, we're not sure if any existing retailers or private equity firms would be interested in picking up a business with sales declining and (possibly) margins declining. K&G also consists of just 97 retail segments while plenty of competitors like TJ Maxx (TJX), Ross Stores (ROST), and even h&m and Zara have added additional competition to the low-priced suit arena. If Jos A. Bank's (JOSB) results are as awful as it foreshadowed in late January, we could see that company adjust its strategy to focus on even lower priced suits. Even eBay (EBAY) has emerged as a low cost route for would-be suit buyers. We're pressed to find a reason why K&G needs to exist.
As for the fourth quarter, Men's Wearhouse posted decent results. Revenue rose 8% year-over-year to $608 million, while the company lost $0.07 per share-both of which were just a touch below consensus expectations.
Echoing what Jos A. Bank said months earlier, the quarter started off exceptionally weak. CEO Doug Ewert elaborated, saying:
"Our fourth quarter started out with an unprecedented volume decline in November which we described in our third quarter earnings release and conference call. The balance of the fourth quarter improved over November results; however, macro-economic conditions remained challenging for our customers throughout the period…"
Sales at the flagship Men's Wearhouse brand increased 9% year-over-year on same-store sales growth of just 1%. However, the high margin tuxedo rental business posted a 9.4% comparable sales growth rate, helping the company's overall gross margin remain basically flat at 41.3%. The firm predicts tuxedo rental same-store sales will grow 5-6% during fiscal year 2013, greater than the company's other segments. This could lead to some modest gross margin upside.
Same-store sales at the Canadian Moore's were down 5.5% during the fourth quarter; though total sales rose 4% year-over-year to $68 million as the segment added additional stores. The firm anticipates 2013 will be slightly better, with same-store sales increasing 1-2%.
Overall, we thought Men's Wearhouse's fourth quarter results were adequate, and its earnings guidance of $2.70-$2.80 (up 6-10%), which was roughly in-line with consensus, was fine. Nevertheless, we believe shares remain fairly valued at current levels, and we aren't very enthusiastic about a sale of K&G as an upside catalyst.
Free cash flow improved to $104 million compared to just $70 million in 2011. The firm did a nice job clearing inventories, which were 3% lower at quarter end than a year ago. We think the $200 million buyback would look like a much better idea if the stock were in the mid-$20's than its current price-but remember, the firm has no obligation to purchase shares with no regard for price. Still, we won't be adding shares to the portfolio of our Best Ideas Newsletter in the near-future.