MW: A Buyer not a Seller

Men's Wearhouse reported 1Q EPS of $0.10 vs. 1Q08 EPS of $0.20 and far better than the Street which was looking for a breakeven quarter.  Results were better across the board with same store sales coming in above expectations, gross margins less bad, and SG&A expenses well controlled.   Perhaps the most surprising factor in the upside was the gross margin line, which was under considerable pressure in 4Q08 due to the company's decision to BOGO suits.  Offsetting this margin pressure was a solid performance from the company's tuxedo business, which grew by 1.7% in the quarter and helped to offset merchandise margin declines in the core retail business.  Overall, a solid performance and yet another example of "stabilization" in the marketplace.


More interesting than the 1Q results is the company's bid of $67 million for Filene's Basement (out of bankruptcy).  The company actually delayed its quarterly conference call as it awaits final court approval on the offer.  Remember, that only a few weeks ago (see our note: Activism Brewing?) we pointed to a new change in control clause in the proxy which essentially gave executives added compensation if the company were to be acquired - the same type of clause used to scare away activists.  Now it goes ahead and bids for Filene's. Interesting narrative.  The purchase price includes 17 of 20 leases, inventory from a total of 25 locations, leases on the headquarters and distribution facility, as well as the Filene's Basement trade name. 


MW's strategy is historically rooted in EDLP.  If you think about it, an off-price chain presents unique opportunities for the company as it diversifies the customer base with a heavier focus on women, offers a channel to clear goods from the namesake chain, and potentially gives the company a growth vehicle for the future.  Additionally, with the success of off-pricers lately (take a look at a ROST or TJX chart), the severe mismanagement of Filene's Basement over the past few years, and the fact that there is still a deep heritage associated with the brand, this might end up being the type of ownership structure that can give Filene's Basement another chance. 


If there is one thing to hope for (admitting that 'hope' is not an investment process), it's that MW brings back the automatic markdown system that actually made Filene's Basement an icon in the industry for so many years.  Yes, it actually was 'iconic' in the retail landscape of yesteryear. This is the type of differentiator that can make this small, regional off-price retailer stand out from the rest of the pack.  For those of you unfamiliar with the automatic markdown system, give us a call and we'll walk you through a quick recap in retail history.  In the meantime, it's probably worth switching gears to focus on MW's plans for growth rather than who might be buying them.


Eric Levine


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