Men's Wearhouse - Surprisingly Strong Quarter Triggers 15% Jump

Sep. 6.12 | About: Tailored Brands, (TLRD)

Shares of Men's Wearhouse (MW), specialty retailer of men's suits and tuxedo rentals, gained 15% in early trading on Thursday. On Wednesday after the close, the company reported a strong set of quarterly results.

Second-Quarter Results

Men's Wearhouse reported second-quarter revenues of $662.3 million, up 1.0% compared to last year. Revenues fell slightly short of analysts expectations of $663.0 million. Gross profit margins expanded by more than 120 basis points to 48.4%, driven by lower costs of goods sold.

Net earnings came in at $59.4 million, or $1.15 per share. This compares to last year's earnings of $1.09 per share, which were impacted by special charges totaling $0.02 per share. In June, Men's Wearhouse warned for a weak quarter. It guided for earnings per share of $1.12-$1.13. Analysts expected the company to earn $1.12 per share for the quarter. At the end of the quarter, Men's Wearhouse operated 1,153 stores, which is down 25 on the year.

CEO Doug Ewert commented on the results:

Sales at our flagship brand Men's Wearhouse stores, which represented 65% of our total second quarter sales, were above both prior-year sales and our plan for the 2012 second quarter. Comparable store sales increased 4.4% as our customers continue to respond positively to our long-standing service model and our trend-right men's apparel during both promotional and non-promotional periods.

Segmental Information

The Men's Wearhouse main division reported a 5.5% increase in revenues to $429.5 million, driven by a comparable-store sales growth of 4.4%. The high-margin tuxedo rental business performed very well.

K&G reported a 2.7% decline in revenues to $90.0 million, as same-stores sales fell by 3.3%. Performance at the division was below expectations.

Moores, Men's Wearhouse's retail brand in Canada, reported a 2.4% decline in revenues to $78.4 million. Despite the decline, revenues came in better than expected as same-store sales increased by 2.5%.

Outlook

For the full year of 2012, Men's Wearhouse anticipates GAAP diluted earnings per share of $2.74-$2.80, up 15%-18% on the year. Sales are expected to increase between 4.8% and 5.6%.

Third-quarter earnings are expected to come in at $0.95-$0.98 per share, up 20%-24% on the year. Sales growth is expected to accelerate to 8.8%-9.3%.

Fourth-quarter earnings are expected to come in between $0.12 and $0.15 per share, which compares to last year's loss of $0.05 per share. Final-quarter sales are expected to grow between 11.3% and 11.8%.

Valuation

Men's Wearhouse ended the second quarter with $106 million in cash and equivalents. The company operates without any debt, for a comfortable net cash position.

After today's 15% jump, shares are valued around $1.85 billion. Excluding the net cash position, this values the firm at $1.75 billion. As such, the market values the firm at roughly 0.7 times its annual revenue estimate of $2.5 billion. Shares trade at 13 times 2012's annual projected earnings. Men's Wearhouse currently pays a quarterly dividend of $0.18 per share, for an annual dividend yield of 2.0%.

Investment Thesis

Year to date, shares of Men's Wearhouse trade with gains of 13% after Thursday's jump. Shares steadily moved upward from $33 in January to highs around $40 in March. A profit warning in June sent shares all the way back to levels around $27, but in recent weeks shares recovered in line with the rest of the apparel sector. After Thursday's jump, shares are trading hands around $37 per share.

Over the past five years, shares trade with losses of up to 30%. Shares traded around the $10 mark by the end of 2008, but gradually recovered to peaks around $40 earlier this year. Men's Wearhouse gradually expanded revenues from $2.0 billion in 2008 to $2.5 billion this year. Profits rose from $59 million, or $1.13 per share, to an expected $2.77 in 2012. Dividends rose from $0.28 in 2008 to an annualized payout of $0.72 at the moment.

I took a look at Men's Wearhouse after the downfall in June, but did not have the guts to pick up any shares. I am impressed with the quick turnaround and a solid quarter. Despite the fact that the company trades at fair multiples and has a rock-solid balance sheet, I will not chase the shares upward. Net profit margins of 5%-6% are historically high, and I find the sustainability of these hard to judge.

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.