Men’s Wearhouse (NYSE:MW), a specialty retailer of men’s suits, is being hammered today after giving third-quarter guidance that was slightly below Wall Street’s expectations. The operator of 1,192 U.S. stores deserves better treatment.
The Houston-based company reported Wednesday that net income rose almost 33% to $57.1 million as solid gains across all its business helped boost revenue 22% to $655.5 million. Adjusted profit was $1.11 per share. On that basis, Men’s Wearhouse was expected to earn $1.04 per share on revenue of $643.6 million.
For the third quarter, GAAP earnings are expected to be between 62 to 64 cents and 64 to 66 cents on an adjusted basis. That beats Wall Street forecasts of 64 cents. The reason why the stock slumped more than 6% Thursday is the revenue guidance calling for an increase of 3% to 4% was below what analysts had forecast. Men’s Wearhouse did not give a specific figure, but its guidance would equal $558 million to $564 million. That’s below consensus forecasts of $569 million.
The overreaction by the market for missing one metric is ridiculous. Some investors used the “miss” as an excuse to dump the stock, which even with Thursday’s market action still was up more than 8% this year. The world, however, has not come to an end at Men’s Wearhouse.
In fact, Men’s Wearhouse should be fine even if there is a double-dip recession. One reason is that fewer companies are allowing their employees to dress casually one day a week. A recent Society for Human Resource Management survey found that 55% of firms allowed the practice, down from 66% in 2007. Another reason is consumers looking to get an edge in the job market might be more inclined to spend more on clothing to present a polished image at a job interview.
Finally, Men’s Wearhouse is being unjustly penalized for being honest. The company easily could have given quarterly revenue guidance that would have encompassed analysts’ expectations. Adding $5 million to the top of its forecasted range would have put a 2% difference between the high and low ends of guidance instead of a 1% difference. No one would have noticed, especially given the wide earnings forecast ranges companies are giving because of the uncertainty about the economy.
Technically, this is an earnings disappointment, albeit a tiny one. The rest of Men’s Wearhouse’s guidance was far from disappointing.
Men’s Wearhouse expects to earn $2.07 to $2.14 per share on a GAAP basis this year. Adjusted earnings — which exclude acquisition expenses and impairment charges — are forecast at $2.13 to $2.20, in line with analysts’ forecasts of $2.14. Revenue is set to rise between $2.37 billion and $2.39 billion, ahead of analysts’ forecasts of $2.35 billion.
Wall Street analysts largely remain bullish on the stock and have an average price target on MW of $37, ahead of the $27.11 level where it traded Thursday. Earlier this year, UBS listed Men’s Wearhouse among its list of possible leveraged buyout candidates. For now, though, hold off on buying these shares because its price-to-earnings multiple of 19.27 seems pricey.
Jonathan Berr does not own shares of the companies listed. Follow him @jdberr on Twitter.
