Men's Wearhouse: Yet Another Specialty Retailer Being A Victim Of A Poor Retail Environment

Sep.12.13 | About: Tailored Brands, (TLRD)

Shares of The Men's Wearhouse (MW) sold of aggressively in Thursday's trading session. A disappointing set of second quarter results, accompanied by a reduced full year outlook, put short-term pressure on the shares.

While a transformed business model could create long-term value, or a take-out could create instant value, I remain on the sidelines. I don't see these materializing with a great probability, or in the short term.

Second Quarter Results

The Men's Wearhouse generated second quarter revenues of $647.3 million, down 2.3% on the year before. Revenues came in short of consensus estimates of $670 million.

GAAP earnings fell by 27.8% to $43.0 million. As the company has repurchased almost 2% of its shares outstanding over the past year, earnings per share fell from $1.15 to $0.85 per share.

Non-GAAP earnings came in at $1.01 per share, severely missing estimates of $1.14 per share.

Looking Into The Results..

The main Men's Wearhouse division reported a modest 0.9% decline in revenues which came in at $426.6 million, supported by 0.7% growth in comparable sales.

The smaller Moores and K&G unit reported sales declines of 4.9% and 5.7%, respectively.

Gross margins fell by 65 basis points to 47.7% of total revenues. Solid margin growth in retail clothing products was made undone by lower tuxedo rental and alteration margins, and higher occupancy costs.

The goodwill impairment charge related to the K&G business of $9.5 million cost a 150 basis point of revenues, while selling, general and administrative expenses rose by 140 basis points to 35.9% on the back of negative sales leverage.

Adjusted earnings came in at $1.01, down 14 cents compared to a year earlier. The company ironically thinks this is mainly caused by a shift in the tux business, as it sees fewer weddings in 2013 as couples think this might be an "unlucky" year.

..And Looking Into The Remainder Of The Year

Just like many other clothing retailers, the company is concerned about macro trends in the apparel industry.

For this reason, the company sees a 2% reduction in comparable store growth rates compared to the guidance from June of this year. This means that comparable sales at the main division are still expected to grow by 2% to 3%. Adjusted full year earnings are now seen between $2.40 and $2.50 per share. Previously, the company saw earnings some 30 cents higher than this range.

Note that this excludes integration costs from the acquisition of JA Holding and goodwill impairment charges related to K&G.

While the company is cautious, it remains upbeat about store openings, the expansion of brands and marketing initiatives, which combined should result in a higher market share.

Valuation

The Men's Wearhouse ended its second quarter with $32.5 million in cash and equivalents. The company operates without the assumption of debt, for a modest net cash position. Inventories stood at $600 million in the past quarter.

For the first six months of the year, The Men's Wearhouse generated sales of $1.26 billion, up little over a percent. Net earnings fell by 12% to $76.0 million in the meantime.

At this pace, full year revenues could come in around $2.5 billion, with adjusted earnings of around $2.50 per share.

Factoring in losses of some 12% following the report, with shares exchanging hands at $34 per share, the market values the company at $1.7 billion. This values assets of the firm at 0.7 times annual revenues and 13-14 times annual earnings.

The Men's Wearhouse pays a quarterly dividend of $0.18 per share, for an annual dividend yield of 2.1%.

Some Historical perspective

Shares of the company peaked around $55 in the summer of 2007. In tandem with the rest of the market, shares had fallen to lows of $10 in 2009 amidst the financial crisis.

Shares have steadily gained ground from that point in time and reached highs of $40 in August of this year. From that point in time shares have given up some 15%, trading at $34. Shares are still trading with year to date gains of around 10%.

Between the fiscal year of 2009 and 2012, the company has increased its annual revenues by a cumulative 30% to almost $2.5 billion. Net earnings tripled to $132 million in the meantime.

Investment Thesis

There has been a lot of turmoil surrounding Men's Wearhouse this year. Back in June it fired its co-founder and then Chairman George Zimmer. The executive and the board were disagreeing over the direction of the company. Zimmer wanted to focus on shareholder interest and consider strategic alternatives, including the option of taking the company private.

Following the departure of Zimmer the company bought JA Holding in a $97.5 million deal, thereby acquiring clothing brand Joseph Abboud. With the acquisition of the wholesale company, the company is aiming to create a full vertical retail model from factory to stores, thereby reshaping the entire business model.

The company furthermore used $100 million to engage in an accelerated share repurchase, thereby reducing the outstanding share base by almost 7% at current levels.

Shareholders are not impressed with the performance and management's direction so far. The business is attempting to redefine its business model by creating an integrated business model, which will take some time and involve some risks.

Some investors will undoubtedly be mad at this moment, as they hoped for a take-private deal somewhere in the forties or low fifties. Instead they are now stuck with the shares at levels around $34 per share.

For now the lower share price gives the company better value for the money, as it can repurchase more shares at current levels. With a resurgence in weddings planned for 2014, the business should relatively be able to stabilize or grow revenues at a modest pace next year. On top of that comes the increased possibility of a deal led by Zimmer as shares trade at current lower levels.

Back in September of last year, I took a look as The Men's Wearhouse prospects. I concluded that I found it hard to judge the sustainability of 5-6% net profit margins going forward, given that they were historically high.

Shares have been dead money over the past year. A successful integration of Joseph Abboud and transformed business model or a take-out could create decent value for shareholders. Yet I'm not overly optimistic of any of these occurring in the short term.

Therefore I remain on the sidelines.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.