The Retail Malaise Hits Menswear

With companies like Macy's,Target, and Wal-Mart Stores reporting weak earnings last month, it seems that retail, specifically apparel, is in a state of malaise. With auto and home-improvement sales going strong this could be the case of consumers prioritizing purchases toward categories which were neglected during the recession.

Joining the weak earnings club this month are menswear companies Men's Wearhouse (NYSE: MW  ) and Jos. A. Bank Clothiers (NASDAQ: JOSB  ) with both seeing big drops in earnings and same-store sales. Has this bad news created opportunity in these companies? Or should they be avoided until things improve?

Weak sales after founder's ouster
Back in June, George Zimmer, the founder and spokesperson of Men's Wearhouse, was fired by the board of directors. This was not a clean process, with accusations flying back and fourth between Zimmer and the board. The iconic commercials, featuring Zimmer and his famous catch phrase, appear to be no more.

The company's second-quarter results, the first reported since Zimmer's departure, don't look great. Total sales fell by 2.3% year over year while GAAP earnings per share came in at $0.85, well below the $1.15 in earnings during the same period last year. Adjusting for one-time items and a shift in tuxedo rentals related to Easter, EPS comes out to $1.01.

While the namesake Men's Wearhouse stores actually saw comparable-store sales increase by 0.7%, Moores and K&G saw comparable-store sales declines of 4.9% and 3%, respectively. The corporate apparel segment also suffered a sales decline of 6.6% year over year.

The company blames macro issues affecting the apparel-retail space, and the results of other companies seem to bear this out. The company lowered its EPS guidance to $2.40-$2.50, putting the stock price, which fell considerably after the earnings announcement, at about 14 times the low end of the guidance.

There's no reason to believe that the issues facing Men's Wearhouse are anything but short term. The year-to-date picture looks a lot better, and one bad quarter doesn't meaningfully change the fundamentals of the company.

Having said that, with Zimmer gone and the company going in a new direction there is significant uncertainty going forward. The company spent most of its cash and took on some debt in order to buy back $100 million of stock and to acquire JA Holding, parent company of the Joseph Abboud clothing brand, for $97.5 million. This has weakened the balance sheet a bit, eliminating a significant net cash position.

While I fully expect the company to recover from this quarter and improve its earnings, I wouldn't buy the stock unless it fell into the high-$20s. That price gives a bit of a margin of safety against management sans Zimmer messing up the brand.

Making Men's Wearhouse look good
While Men's Wearhouse's results weren't good, Jos. A. Bank's were downright terrible. Comparable-store sales dropped 15.9% year over year, with total sales falling 10.7%. Earnings per share fell to $0.51 compared to $0.83 in the same period last year, a 39% reduction.

Jos. A. Bank announced an expected EPS range of $0.49-$0.53 a few weeks before earnings were released, removing the surprise of the poor earnings. The size of the comparable-store sales decline is worrisome, and I don't think macro issues alone can argue them away. Men's Wearhouse's namesake stores grew comparable-store sales, albeit slightly, making the 15.9% decline for Jos. A. Bank look atrocious in comparison.

Jos. A. Bank trades at a premium to Men's Wearhouse, with shares priced at about 15 times last year's earnings and 16.4 times analyst estimates for full-year earnings. I don't think that this premium is justified given the massive sales declines, and I'd stay away from the stock.

More diversified options
Department stores Macy's (NYSE: M  ) and Nordstrom (NYSE: JWN  ) , which sell menswear along with plenty of other items, have seen better results than the pure menswear retailers. Macy's earnings grew slightly last quarter, missing analyst estimates as the company blamed shoppers' reluctance to spend. Compared to the weakness in other apparel retailers, though, Macy's results are encouraging. Nordstrom fared even better, with earnings rising by 24% as revenue shot up 6.3% year over year.

The diversity of products sold by both companies allow them to weather consumer weakness a bit better than retailers focused on one category. For this reason large, diversified apparel retailers may be the place to look for relative stability compared to smaller, more focused names. Macy's trades at just 10 times the average 2014 expected earnings, while Nordstrom trades at a loftier 13.7 times estimates. With the weaker results from Macy's driving the stock price down, shares have become significantly more attractive.   

The bottom line
Men's Wearhouse looks far more attractive than Jos. A. Bank, although I'd like to see the price fall a bit before buying any shares. It does remain to be seen if management without Zimmer can maintain the brand, but this quarter's weakness looks to be out of management's hands.

Jos. A. Bank, on the other hand, clearly made some mistakes. A 16% comparable- store sales decline is not normal, and I'm surprised that the stock wasn't hit harder. The shares look overvalued even compared to last year's earnings, making Men's Wearhouse the clear choice.

No Pitch

 


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