by Will Ashworth | March 15, 2013 1:36 pm
Earlier this week, Men’s Wearhouse (NYSE:MW) spiked 20% in one day on news it is considering a sale of its K&G discount-clothing business. That put the company’s year-to-date gains just under 10%, and just ahead of the broader market.
Meanwhile competitor Jos. A. Bank Clothiers (NASDAQ:JOSB) is barely in the black for 2013 and 21% in the red for the past 52 weeks. Still, over the long-term, JOSB remains the better performer.
When it comes to Men’s Wearhouse, you’ve heard the slogan a million times: “You’re going to like the way you look.” George Zimmer — the company’s founder and pitch-man — is Men’s Wearhouse. It’s nearly impossible to separate the two … even though Zimmer stepped down from CEO to Chairman back in 2011.
Like every founder-run company, there comes a time when he or she must step aside ushering in a fresh perspective. Long-time COO Doug Ewert took Zimmerman’s spot.
Business has marginally improved in Ewert’s 21-month tenure but if you back out the 20% gain from March 14, MW stock is actually down 3% … compared to a 46% gain for the SPDR S&P Retail ETF (NYSE:XRT) during the same time period.
In fact, despite MW outperforming JOSB on an annualized basis over the past three years, the two stocks have performed almost identically since Ewert’s taken the helm.
So … which horse should you ride?
This was an easy decision for me … until JOSB’s announced in late January that net income in fiscal 2012 would be 20% lower year-over-year. While JOSB will go over $1 billion in revenue for the first time in its history, earnings — if it’s bad as the company suggests — will be approximately $78 million. That’s similar to what it generated in fiscal 2009 with 25% less revenue.
Still, it’s important to determine whether a weak Q4 was just bad luck or something more permanent. A quick review of the first three quarters of the year shows some definite cracks in the foundation, though. In Q3 2012, the company’s gross profit margin decreased 560 basis points due to higher mark-downs and greater sourcing costs.
In the previous two quarters, gross margins declined by 370 basis points in Q2 and 130 basis points in Q1. Plus, there’s a good chance the Q4 decrease — which will be announced March 25 — will be worse than its most recent quarter. If that’s the case, full-year gross margins will be lower than they’ve been in a decade.
Meanwhile, over at Men’s Wearhouse, gross margins have been holding the line or improving. In fiscal 2012 they were 44.5% — 51 basis points higher than a year earlier. That’s its best profitability since fiscal 2007. However, Jos. A. Bank, despite a margin collapse in 2012, will likely still have a significant margin advantage of at least 12 percentage points.
So, which stock is the better buy? At the current moment, both have an enterprise value that is approximately 5.7 times EBITDA. Using trailing 12-month figures from Yahoo Finance, JOSB’s multiple is slightly lower. But after it reports in 10 days time, it will be virtually the same or even slightly higher than MW due to the margin weakness discussed previously.
It’s also easy to see why Men’s Wearhouse jumped 20%. K&G is a poor performer compared to its Men’s Wearhouse brand in the U.S. and Moore’s in Canada. Getting rid of it will improve profitability and help the company focus. MW is also repurchasing up to $200 million of its stock. Although it bought back 2.3 million shares in fiscal 2011, it’s not a regular buyer of its stock … so this is could be an indication the management feels the stock price is headed higher.
Still, Jos. A. Bank is a long-time performer that’s having a moment in business where all the things it’s doing aren’t translating into a great deal of success. That happens to the best of us … and in eight out of the last 10 years, JOSB’s stock has outperformed MW by a country mile. While its same-store sales continue to grow, it’s having to spend more on advertising and promotional activities and that’s lowering its profitability. It’s not the first time it’s seen this happen and it won’t be the last … but it’s also not the end of the world.
While good things are happening at Men’s Wearhouse, I believe it’s always prudent to go with the best long-term company. For this reason, I’d recommend buying Jos. A. Bank Clothiers — especially if its stock drops below $40.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.
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