Men's Warehouse - Are we liking the way they look?

I've decided to throw in some bad puns into the blog. Thankfully no one is paying attention anyway. 800 retail location selling suits + 450 tuxedo rental stores. The tuxedo rental business has been acquired in 2007 from Federated, and the After Hours brand has been repainted to MW Tux. The retail locations are operated under MW name (600 locations) and K&G (100) which caters to lower income consumer. Another 100 locations are in Canada operating under Moores name.

The company prides itself on having prices that are 20-30% below those in department stores. It sources ~40% of its merchandise directly, principally from Asia.

Average store economics. Retail location is 5.7K sq feet on average, MW Tux is much smaller, 1.3K, while K&G is much larger, 23K. Net sales per sq foot are 478 for MW and 220 for K&G. Comps have been tough recently, especially for K&G which declined 10%. Each MW location thus sells 5.7K x 480 = 2.6M., with almost 50% gross margin. SG&A is another 35% of sales. SG&A has grown as % of sales recently due to acquisition of After Hours which brought along 8 additional distribution facilities and also increase in salaries.

Future prospects. Management historically has rolled out stores aggressively, however 600 U.S. locations seems to be the cap. For 2007, company has opened 42 stores, in 2008 plans are to open 20 new MW stores, 22 Tux and 3 K&G. Assuming average store productivity, that's around 3% revenue growth. I expect comps to very tough - just look at the previous downturn and you'll see 10% decline. Making quick back of the envelope, assuming only 50% of SG&A is variable, you get ~20% decline in EPS. Take a more gloomy view, the gross margin will not stay flat as % of sales but will actually decline several percent, while SG&A will stay flat, and then you'll get ~30% decline.

Ok, now having written this I actually checked the most recent press releases, same store sales for Q4 and analyst commentary, and behold, the earnings are actually projected to fall 30%, and the traffic trends are down 7-8% already.

Valuation. Currently trading at 24 a share, or 12X 08 EPS. For a company with 5-6% growth prospects (2-3% sq footage growth, and 2-3% comps), 14X EPS feels like the right number. We can assume the EPS will revert back to 2.5 in 2009-2010, in which case the stock should be worth $35. Right now the risk reward is not overly compelling, but if the price dips below 20 again, I'd be a buyer.