Activist investing and special situations for the retail side.

This Stock Is Dressing Up: Men's Wearhouse (MW) And More

Added on by Lee Ho Fook.
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Be sure to check out our detailed stock analysis (click here). It appears Men’s Wearhouse, Inc. (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 recent 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-ended quarterly results came in at a $0.07 loss per share, below consensus estimate of only 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 Jan.), then 4% in 2014; this despite the expected continue 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 pressuring all the major retailers; however, Men's Wearhouse has managed to hedge some of this slowness with new product introductions that includes 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 Inc (NASDAQ:JOSB)has traded in lock in lockstep with Men's Wearhouse over the past twelve months...

...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 pays 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 at 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, Inc. (NYSE: EXPR) and Ann Inc (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 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-ended 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 Corp (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; however, the company does trade at 30 times earnings, making it a bit expensive. The company did raise guidance for last quarter results based on better than expected holiday sales, now expecting sales of $85 million, which will be an increase of 38% year over year. Worth noting is that the company does have a high level of short interest, around 45% of float (yet see why Francesca's is a great brick-n-mortar stock).

Don't be fooled

Although Men's Wearhouse has seen a nice move in its stock of late, there is still upside for the company. Another big advantage to Men's Wearhouse is its initiatives to return cash to shareholders. The company pays a 2.1% dividend yield, whereas none of the other stocks listed pay a dividend. In conjunction with last quarter earnings announcement, the company's board approved a $200 million share buy back program. Niche activist hedge fund, Glenhill Advisors, is also a big fan of Men's Wearhouse, upping their stake by 2,000% last quarter. This put the retailer as Glenhill's fourth largest stock holdings and accounts for 4.75% of the hedge fund's assets.