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The Men’s Wearhouse, Inc. (MW), Ross Stores, Inc. (ROST): Is it Time to Suit Up with this Retailer?

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The Men’s Wearhouse, Inc. (NYSE:MW) can be a frustrating enigma. Its price movements are often erratic, yet it has risen more than 60% over the past five years, and 250% over the past decade. Recently, the Houston-based company posted top and bottom line growth that both missed analyst estimates, topped off with utterly mediocre same-store sales growth.

The Men's Wearhouse, Inc. (NYSE:MW)

Yet the stock rallied nearly 20% on news of a possible sale of its K&G brand along with a big stock buyback. Was this surge of optimism justified? Let’s break down the numbers and see if investors are getting a bit ahead of themselves.

Fourth Quarter

For its fourth quarter, The Men’s Wearhouse, Inc. (NYSE:MW) reported a loss of $3.4 million, or $0.07 per share, a slight improvement for a loss of $3.8 million, or $0.07 per share, in the prior year quarter. That missed the Thomson Reuters average analyst estimate for a loss of $0.05, and also came in two cents short of the low-end of the company’s prior guidance.

Meanwhile, revenue rose 8.2% to $608.4 million, also missing the forecast of $610.0 million. CEO Doug Ewert attributed the decline to an “unprecedented volume decline in November,” and “challenging” macroeconomic conditions.

However, the company sees a more profitable year ahead. The company expects to earn $2.70 to $2.80 per share for 2013, in line with the analyst estimate of $2.77 per share, representing a year-on-year profit increase of 5.9% to 9.8%. Sales are expected to rise 2.85% to 3.85%.

Sales Growth

The Men’s Wearhouse, Inc. (NYSE:MW) operates three main stores: Men’s Wearhouse, Moore’s, and K&G. Both Men’s Wearhouse and Moore’s offer casual to formal wear for men, while K&G is geared toward men, women and children.

Men’s Wearhouse is by far the company’s largest brand, with 638 namesake stores and 288 Men’s Wearhouse and Tux stores featuring higher-end, limited suit and tuxedo collections. The company finished the quarter with a total of 1,143 stores.

Same-store sales were weak at all three brands, improving 1% at its namesake brand while declining 5% and 5.7% at Moore’s and K&G, respectively. Men’s Wearhouse’ sales were driven by its classic promotions, such as “buy one suit, get one for $100.”

While those numbers look weak, they actually represent a slow turnaround for the company, which has seen single-digit revenue improvements in recent quarters, thanks to a renewed interest in men’s apparel boosted by a strengthening U.S. economy. A new focus on slimmer, tighter-fitting suits for young men has also generated fresh sales.

During the quarter, the company’s retail sales rose 6.8%, while its corporate apparel sales grew by 21.5%.

Goodbye, women and children!

Generally, weak revenue growth, an unprofitable bottom line, and bleak same-store sales don’t cause a stock to rally 20%, as the stock did on March 14.

That surge was mainly caused by the company’s statement that it was evaluating “strategic options” for its lagging K&G brand, which generated roughly 13% of the company’s 2012 revenue with its 97 stores.

K&G is an off-price retailer, which sells discontinued brand name products at steep discounts. This is similar to the strategy employed by Ross Stores, Inc. (NASDAQ:ROST) and The TJX Companies, Inc. (NYSE:TJX), which owns Marshalls and TJ Maxx.

However, as reflected by recent earnings reports from those two retailers, the payroll tax hike and delayed tax returns are slowing down sales to the core demographic of off-price retailers – the middle class.

Ewert acknowledged that the company’s strength primarily comes from its namesake stores and Moore’s – in other words, menswear – and not K&G’s apparel for women and children. Ewert said that sales at K&G were disappointing, with customers not responding to promotions and new marketing campaigns.

Therefore, the company has hired Jefferies & Co. to assist in exploring options for K&G, which could either be spun off or sold.

But who would buy K&G?

At this point, the stock’s price action indicates that The Men’s Wearhouse, Inc. (NYSE:MW) investors are hoping for a buyout, and not a spinoff. But who would seriously want to buy a lagging off-price retailer with negative same-store sales growth? Worse yet, Men’s Wearhouse expects sales at K&G to continue declining 3% to 4% in fiscal 2013.

Fellow off-price retailers Ross Stores, Inc. (NASDAQ:ROST) and TJX could possibly purchase K&G, since the business could be horizontally integrated for some cost-saving synergies, if executed properly. Ross Stores, Inc. (NASDAQ:ROST), which intends to double its store count to 2,500 stores by the end of the decade, might be able to pick up those 97 stores at a discount and re-brand them. I also believe private equity firms, such as Bain Capital – which owns Burlington Coat Factory – might express interest in K&G.

Regardless of its fate, analysts are upbeat regarding a sale of the K&G business. Cowen and Company analyst John Kernan sees “a one-time dividend or share repurchases” on the horizon if the deal goes through.

Stock Buyback

Speaking of share repurchases, Men’s Wearhouse also stated that its board approved a new share-repurchase program of $200 million, on top of the $45 million still available from its previous share buyback.

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