Men’s Wearhouse Stock Fits Just Right

Men’s Wearhouse (MW) has seen business pick up nicely of late, and the tuxedo rentals business was among the highlights in their quarterly report on Wednesday.   Shares of the menswear retailer are surging nearly $3 or 15% in morning trading as a result of the better than anticipated first quarter.  Earnings per share almost doubled expectations of $0.14 per share, coming in at $0.26, and they anticipate second quarter earnings per share to be $0.75-$0.78 which is conservative in comparison to analysts’ expectations of $0.78.  First quarter revenue proved to be $473.5 million versus the Street’s estimate of $458 million.  Overall sales grew 2% (they were expected to show slight declines) thanks in large part to 2.4% gain in same store sales and 5.3% growth in store traffic.

The results were boosted by gross margins of 42.5% from 40.5% last year, which of course is helped by the better than expected sales results.  The company was able to toe the line of bringing in new business with promotions while not sacrificing profit margins.  The company reported that occupancy rates dropped in the quarter also padding margins.  Cost cutting extended to inventory which fell 5.5% and capital expenditures also declined 26% from a year ago.  However, they are not opposed to spending money where it sees growth potential.  For example, the company plans to continue this positive momentum by stepping up marketing spending for all three brands, including a new television campaign for the company’s namesake stores.

This past quarter was a strong one for MW and the stock is being rewarded exceptionally well by the market for its performance.  However, we do find it interesting that investors have been more than willing to gloss over the conservative guidance for the second quarter (seasonal trends bring in the bulk of MW’s profits in that quarter).  As recently as a two weeks ago, we had an Overvalued rating on Men’s Wearhouse because, according to our methodology, the stock had climbed too high in the mid-$20’s.  It was simply not justified by the fundamentals (or what we believed them to be at that time).  It quickly dropped nearly 25% coming into this report, and we upgraded the stock to Fairly Valued as of this week’s report.  We will likely leave this stock as Fairly Valued in the coming weeks barring continued strong price appreciation because the fundamentals were stronger than we had anticipated.  The company has lowered costs across their business down to the rent they pay, and sales trends are showing improvement.  While we would not recommend buying into a stock on such a huge run as MW is having, it is not looking as overvalued as we thought a few weeks back.

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