With unemployment at 9%, do the out-of-work buy new suits to interview for scarce jobs, or do they hold on to their dwindling cash and make do with their old duds? One way to answer that question is to look at men’s apparel retailers such as Jos. A. Bank Clothiers (NASDAQ:JOSB) and Men’s Wearhouse (NYSE:MW). Should you suit up your portfolio with the shares of either company?
The men’s clothing retailing industry is large — $9 billion — but it has gotten smaller in the past year at a 1.3% rate, according to IBISWorld. Behind this drop is the weak economy that crimps demand. As IBISWorld wrote: ”Sinking consumer sentiment, brought about by skyrocketing unemployment and a slowdown in personal disposable income growth” cuts into demand for men’s clothing.
However, IBISWorld expects the industry to grow slightly — at a 2.3% annual rate through 2016 — as the economy recovers. And Men’s Wearhouse and Jos. A. Bank are among the biggest players, with market shares of 20.2% and 10.3%, respectively.
Based on this analysis suggesting a tight link between the state of the economy and the change in sales at these men’s retailing industry leaders, their recent financial results could well be a barometer of the state of the American consumer.
And by that measure, it looks like that consumer is in surprisingly healthy shape. Prior to Jos. A. Bank’s Wednesday earnings announcement, analysts expected a strong performance. They were looking for a 13.1% revenue boost to $196 million and EPS of 51 cents per share. But JOSB exceeded those expectations handily — reporting a 21% sales pop to $210 million and EPS of 54 cents – three cents more than expected. Behind the great results were a 14.6% increase in same-store sales and a 28.6% boost to sales from so-called direct sales.
When it last reported its fiscal second quarter, Men’s Wearhouse — which, back in May, I thought was too pricey – did even better. Its adjusted EPS of $1.11 beat analysts’ expectations by seven cents, and its revenues climbed 22% to about $656 million thanks to its 2010 acquisition of two British corporate uniform companies and sales increases from its retail, tuxedo rental and alteration business units.
Here’s what the investment choice between Jos. A. Bank and Men’s Wearhouse boils down to:
- Jos. A. Bank: Fast-growing, good margins; fairly expensive stock. JOSB’s sales have risen 11.4% in the past 12 months to $915 million, while its net income rose 20.6% to $91 million — yielding a slim net margin of 4%. Its price/earnings-to-growth ratio is a pricey 1.29 (where a PEG of 1.0 is considered fairly priced) on a P/E of 15.6 and expected earnings growth of 12.1% to $3.91 in fiscal 2013.
- Men’s Wearhouse: Growing, slim margins; somewhat pricey stock. MW’s sales have increased 10% in the past 12 months to $2.3 billion, while net income has soared 47% to $95 million — yielding a slim net margin of 4.1%. Its PEG of 1.16 is slightly overvalued on a P/E of 15.1 and expected earnings growth of 13% to $2.49 in fiscal 2013.
I am not jumping up and down about either of these stocks. They both are a bit expensive, but Jos. A. Bank has much wider profit margins than Men’s Wearhouse. And that means if its sales grow faster than expected, its earnings will grow even faster than the same sales growth boost would induce at Men’s Wearhouse.
I would look for a broad market dip to buy shares of JOSB and hold off on MW. But the good news for the broad economy is that if these two are bellwethers, their rapid sales growth bodes well for the future.
As of this writing, Peter Cohan did not hold a position in any of the aforementioned stocks.