Friday, May 06, 2011

Is There Still Time To Shop For Profit At Men's Wearhouse?

The Men's Wearhouse (NYSE: MW) enjoyed an eye-popping 15% spike in its stock Thursday. The question for investors is whether the company will continue to surprise on the upside or its best days are behind it.

Men's Wearhouse sells suits and its CEO spends quite a bit of his money on telling TV viewers that he guarantees customer satisfaction. George Zimmer's confidence in that claim reminds me of Dos Equis beer's Most Interesting Man in the World. And Men's Wearhouse's first quarter earnings forecast -- it will report on June 8 -- certainly suggests that confidence has its rewards.

Men's Wearhouse operates over a thousands stores -- mostly in the U.S.. Specifically, as of January 2011, it operated 1,192 retail stores, with 1,075 stores in the United States and 117 stores in Canada. Its U.S. retail stores are named Men’s Wearhouse (585 stores), Men’s Wearhouse and Tux (388 stores) and K&G (102 stores) in 47 states and the District of Columbia. Its Canadian stores are known as Moores Clothing for Men in ten provinces. Men's Wearhouse operates a retail dry cleaning and laundry operations through MW Cleaners.

The rewards of its confidence are evident in its announcement of a big boost to its earnings expectations for the first quarter of 2011. Specifically, its new Q1 GAAP diluted earnings per share (EPS) estimate ranges from $0.46 to $0.49 -- that's between 59% and 69% higher than the previous of $0.29. The upside surprise flows from positive consumer response to its so-called value offerings. The result was that revenue rose 10.8% at its Men's Wearhouse stores, 9.3% at its K&G stores and 6% at its Moores Canada stores.

Is Thursday's good news, the propelled Men's Wearhouse stock to a 52 week high, sufficient to warrant a buy order? To make that decision, you might consider using the price-to-earnings-to-growth (PEG) ratio that compares a stock’s market valuation to its forecasted earnings growth. By that measure, if a stock trades at a PEG of 1.0 or lower, it is reasonably priced. Higher than that, and it looks overvalued.
Based on PEG of 1.67, Men's Wearhouse looks expensive. After all, it trades at a P/E of 25 and its earnings are forecast to grow 15% to $2.08 in 2012. If you look at the last five quarters, Men's Wearhouse has surprised on the upside by an average of 28.5% -- but that masks big differences each quarter. So that 2012 estimate could be on the low side.
On the other hand, Men's Wearhouse has been sued for issuing false guidance.  According to its most recent 10K, it is facing a lawsuit, Material Yard Workers Local 1175 Benefit Funds, et al. v. The Men’s Wearhouse, Inc., Case No. 4:09-cv-03265, alleging that it "issued false and misleading press releases regarding its guidance for fiscal year 2007." Maybe Men's Wearhouse has mended its ways or maybe yesterday's announcement is not what it seems.
And Men's Warehouse has a pretty big debt payment coming up within the next year that exceeds the amount of cash on its balance sheet. More specifically, it will need to repay $162 million worth of its $746 million in debt within the next year. And it had a mere $136 million in cash on its balance sheet in January, down $50 million from the year before.
Nevertheless, I think at a PEG of 1.67, the potential for upside surprise may already be factored into the stock.


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