Natty-attire retailer Men's Wearhouse (NYSE: MW) released third-quarter results yesterday, and the numbers looked pretty darn dapper. But the company hit a "guidance wall" with the news that next quarter's results would be well below previous expectations.
The stock dropped into a black hole today, down 17% from yesterday to around $34, a price we haven't seen for the company since early last year. This prompts me to ask whether there is really a problem with the company, or whether this is just a case of efficient markets acting not-so-efficient.
Total sales were boosted 19% over last year, but comp sales were down 2% in U.S. stores. The company said "unseasonably warm weather" hurt early-season sales, which I can believe -- customers are not inclined to buy coats or heavier-weight suits until they feel a chill in the air.
Operating income and earnings per share grew 21% and 19%, respectively -- both in line with sales growth. Tuxedo rental sales, including the acquisition of After-Hours Formalwear earlier this year, increased 178%. All this is looking pretty solid to me.
Management estimated that fourth-quarter comp sales would again be slightly negative. But the real shocker was EPS guidance of $0.43 to $0.48, about $0.10 less than analyst consensus expectations of $0.55, according to Thomson Financial.
The underlying problem here is pretty clear. While comp sales are trending below expectations, the real kicker is management's underestimating the fourth-quarter impact of acquiring a tuxedo rental business, which is incredibly seasonal.
Tuxedo rental is highly profitable from May through August, with high school graduation and lots of weddings. The business loses its starched shirt during the rest of the year. Management admitted the After-Hours acquisition would be $0.31 to $0.32 dilutive in the fourth quarter.
Investors' reaction to this guidance faux pas looks overblown to me. The company still expects 15% long-term growth, and economic conditions have retailers like J.C. Penney (NYSE: JCP), Kohl's (NYSE: KSS), and Macy's (NYSE: M) posting modest sales growth, suggesting that Men's Wearhouse's lower guidance probably isn't related to firm-specific issues.
I'm hanging my hat on Men's Wearhouse being the dominant player in a small but profitable retailing niche. I expect tuxedo rental to be a good complement to the core suit-and-tie business, once management gets the seasonality figured out and our economy gets back on track.
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