Maverick Capital Moves Into Clothing Retailers

Lee Ainslie's Maverick Capital has taken new positions in Men's Wearhouse and Abercrombie & Fitch.
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BOSTON (TheStreet) -- Lee Ainslie, founder of New York-based Maverick Capital Management, purchased shares of clothing retailers Men's Wearhouse (MW) and Abercrombie & Fitch (ANF) - Get Report during the first quarter.

Both represent new positions. Ainslie's flagship hedge fund has gained 14% a year since its 1995 inception, twice that of the

S&P 500

. Ainslie warned of "moribund consumer spending" in his annual letter.

Still, he recently purchased 3 million shares of both Men's Wearhouse, equaling 5.3% of the float, and Abercrombie, totaling 3.3% of the float. He now ranks as the fifth-largest shareholder of Men's Wearhouse and the seventh-biggest owner of Abercrombie. Men's Wearhouse has declined 12% in the past month as Abercrombie fell 19%. The stocks have a beta, a measure of market correlation, of more than 1, tending to magnify indices' direction.

Interestingly, both companies swung to losses in the latest report periods. Men's Wearhouse swung to a fiscal fourth-quarter loss of $19 million, or 36 cents a share, from a profit of $1.5 million, or 3 cents, a year earlier. Revenue declined 4% to $457 million. Despite the quarterly loss, the balance sheet improved. Men's Wearhouse boosted cash 78% to $186 million and cut its long-term debt 31% to $43 million.

The sell-side isn't as optimistic as Ainslie. Of firms rating Men's Wearhouse, two, or 33%, advise purchasing its shares and four recommend holding them.

Wedbush Securities

expects the stock to gain 42% to $29.

JPMorgan

(JPM) - Get Report

predicts that it will rise 8% to $22. Along with Ainslie,

BlackRock

(BLK) - Get Report

and

State Street

(STT) - Get Report

purchased shares during the first quarter, enlarging existing positions to 4.3% and 3.7% of the float, respectively.

Abercrombie fared comparatively better than Men's Wearhouse during the first quarter. Its loss narrowed to $12 million, or 13 cents, from $59 million, or 68 cents, a year earlier. Revenue gained 12%. Abercrombie's operating margin remained negative. Still, its cash balance grew 36% to $633 million. Debt fell 29% to $71 million. Both companies have lofty gross margins -- 63% for Abercrombie and 42% for Men's Wearhouse.

Analysts' views of Abercrombie are mixed. Of those covering the company, 13, or 39%, advise purchasing its shares, 18 recommend holding and two suggest selling them.

Jefferies

(JEF) - Get Report

expects the shares to more than double in value to $75.

Credit Suisse

(CS) - Get Report

forecasts that the stock will rise 82% to $63. The asset-management units of

Deutsche Bank

(DB) - Get Report

and

Goldman Sachs

(GS) - Get Report

purchased Abercrombie's stock during the first quarter.

Both Abercrombie and Men's Wearhouse trade at a massive discount to growth as indicated by their PEG ratios, a valuation measure calculated by dividing a stock's price-to-earnings ratio by its projected long-run growth rate. Abercrombie sells for a PEG ratio of 0.3 and Men's Wearhouse sells for a PEG ratio of 0.6, 70% and 40% discounts to estimated fair value. Although consumer spending outlook is murky, these stocks are worth consideration.

-- Reported by Jake Lynch in Boston.

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