Men's Wearhouse Takes Advice of Activists

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It's been a rough-and-tumble year for Men's Wearhouse , yet both the company and its stock appear to be ending 2013 on a high note. The suit seller has seen the ouster of founder George Zimmer and subsequent backlash, the continued struggle with its big-box format K&G stores, a buyout offer from its smaller rival, and the increasingly nerve-wracking presence of activist shareholders. In this week's earnings report, though, the company was able to rise above analyst estimates with encouraging sales figures. More important, management opened the door to negotiations for a potentially lucrative merger.

Full suit
Sales grew 2.8% to $648.9 million in Men's Wearhouse's fiscal third quarter. Analysts had expected only $627.4 million -- giving everyone an early holiday surprise, especially considering the overall tepidity in the retail apparel market.

Net income actually fell year over year, as expected, to an adjusted $0.90 per share -- $0.04 ahead of estimates. At the company's namesake brand, same-store sales rose a decent 2.6%. For the full year, management stuck to its previously issued earnings-per-share guidance of $2.40 to $2.50. Those numbers do not reflect the costs that came from Men's Wearhouse's earlier acquisition of Joseph Abboud, a goodwill impairment charge from aforementioned K&G, and a few other one-time events.

While the earnings report was encouraging and proof that the company's direction is finding traction in a difficult retail environment, the big takeaway for investors looking ahead to 2014 is the potential for a merger with Jos. A. Bank .

Better, fatter
After firmly rejecting a buyout offer earlier this year from Jos. A. Bank, Men's Wearhouse reconsidered its options after 10% holder Eminence Capital pushed for a reversed deal. The bigger of the two companies is now offering $55 per share for the smaller one, financed by debt and cash.

Teaming up with Jos. A. Bank makes a lot of sense. Men's Wearhouse would save significantly more than $100 million in annual expenses, especially on the marketing front. The company would not need to be as aggressive in pricing strategies and would have a 1,700-store footprint. Both are well-respected brands with a great growth runway (particularly the high-margin tux rental business). Jos. A. Bank management has said it is reviewing the deal -- a much better response compared to when the tables were turned a few months back.

At nearly 19 times forward earnings estimates, Men's Wearhouse isn't going to be on the menu for most value investors, but the potential acquisition lowers that ratio and creates a more attractively priced stock. Of course, betting on the outcome of merger and acquisition activity is a very tricky game, and investors should proceed with caution.

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