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The Men’s Wearhouse, Inc. (MW): Weak Outlook

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The Men’s Wearhouse, Inc. (NYSE:MW) is in a tough retail sector, but its specialty in men’s clothing has given it brand-name recognition and a loyal customer base. On Mar. 15, the company announced its 4Q12 results and its decision to evaluate strategic alternatives for K&G.

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

The Men’s Wearhouse, Inc. (NYSE:MW) is a specialty retailer focusing on men’s suits and the business of tuxedo rental in both US and Canada. As of Feb. 2, it operated 1,143 stores in the US and Canada under the brands, Men‘s Wearhouse, Men’s Wearhouse and Tux, Moores Clothing for Men, and K&G.

The news of the hour is its decision to evaluate alternatives for one of its weaker performing units, K&G. Men’s Wearhouse has begun re-evaluating its operating structure and capital-allocation program and wants to better focus on its namesake brand and Moore’s men’s. K&G accounts for 16% of FY12 retail segment sales and posted a 5.7% decline in its comps for FY12. This was mainly due to a poor customer response to the company’s promotions and new marketing campaign. It has engaged Jefferies & Co. to assist in evaluating strategic alternatives for K&G.

Besides the decision to sell K&G, the company also announced its 4Q12 results. It reported 8% growth in revenue and a net loss of $0.07 per share in 4Q12 vs. analysts expectations of a loss of $0.05 per share on revenue of $610 million (Source:FactSet). Despite the below expectations results, the company’s shares rallied 20% to $34.62 mainly due to the K&G announcement and given that its performance was better than its competitors.

The sale of K&G will definitely help the company to improve its profitability, but I would like to delve into further details checking into whether the company will make a good investment. Let us analyze the company on the following parameters:

4Q12 operating performance

The Company experienced an unprecedented volume decline in November, but the balance of the quarter improved despite facing the same macro economic challenges. For 4Q12, revenue increased 8% with 1.5% positive comps, below the company’s guidance of 9.5% to 10.5%. 4Q12 gross profit was up 8% with flat margins. Selling, general and administrative expenses increased 8.3% resulting in a net loss of $3.1 million.

Sales growth has not been impressive in the last 5 years. The company posted 6% and 60% declines in revenue and net income in FY08, respectively. The company was able to come out of the recession posting a 10% increase in sales year-over-year in FY10, but again has faced weak sales growth of 4% and comps in FY12 given the slow economic recovery.

Strong balance sheet

The company has no debt and has $156 million cash on hand as well as generates positive cash flows every year. To add to the liquidity cushion, it has a $200 million credit facility with no borrowings outstanding. Further, the company plans to increase the facility to $450 million and extend it to 2018. The amended facility will also provide for a $100 million term loan, which would, if drawn, be repayable over 5 years with 10% payable annually and the remainder due at maturity.

Returns to shareholders

The company remains dedicated to returning cash to shareholders in the form of share-buybacks, and dividend payments. It recently approved a new $200 million share buy back program with $45 million remaining on the company’s previous buy back authorization.

Segment performance

The Men’s Wearhouse, Inc. (NYSE:MW) and Tux stores is the company’s most profitable segment. It accounts for only 8% of FY12 sales, but commands an astounding 84% gross margin, more than the company‘s overall gross margin of 40%.

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