In this week's Small-Cap Spotlight, we are looking at

Men's Wearhouse

(MW)

, the specialty retailer of men's suits and tuxedos.

Shares are trading just above $50, up nearly 50% over the past 12 months. But with many retailers experiencing the effects of a broad slowdown in consumer spending, will Men's Wearhouse buck the trend, or should investors take some profits?

Curzio: Stock Still Has at Least 20% Upside

Men's Wearhouse is known for selling brand-name and private-label suits and apparel at affordable prices through its Men's Wearhouse and K&G stores. But its recent acquisition of After Hours -- the largest chain of tuxedo stores in the U.S. -- has given the company a much-needed catalyst that will result in a higher share price over the next 12 months.

Back in April, Men's Wearhouse's purchase of After Hours showed an immediate impact to earnings when the company reported better-than-expected results in its first quarter, released in May. The After Hours segment accounted for 11% of earnings as the company began selling and renting tuxedos through its more than 1,000 Men's Wearhouse outlets.

The huge demand for tuxedos was highlighted once again when Men's Wearhouse reported its second-quarter results two weeks ago, which beat consensus earnings-per-share estimates by more than 5%.

Men's Wearhouse' stellar results were once again due to the After Hours segment -- which grew to 24% of earnings for the quarter. Management said that the tuxedo chain also was responsible for much of the 500-basis-point increase in gross margins year over year.

To put this catalyst in perspective, I recently had to rent a tuxedo for one of my friend's weddings at a mom-and-pop retailer for more than $200 for the weekend. Not only could I have rented the same tuxedo at Men's Wearhouse for 25% less (which I found out after the fact), but I could have been measured two blocks away from my job during lunch and picked up the tuxedo less then one mile away from my house the following week after work.

This gives Men's Wearhouse a huge advantage over its competitors in terms of pricing and efficiency -- something management was well aware of before acquiring After Hours. To realize the potential size of this market, consider how many weddings, funerals, proms and special events each man attends that require wearing a tuxedo. Shoes and accessories -- also provided by Men's Wearhouse -- must be bought or rented as well.

While the tuxedo market will be lucrative for the company over the long term, management has done a great job increasing shareholder value through stock repurchases and inventory management and is also looking to expand into casual wear and shoes.

Last quarter, Men's Wearhouse bought back almost 500,000 shares and announced a further increase in its buyback program by another $100 million on Aug. 22. (Buybacks do not require time periods -- the company can buy back shares whenever it deems necessary.)

Last quarter, inventories grew by 7% while sales growth jumped 24% -- another credit to the company's experienced management team. Also, management said it's looking to expand into casual wear and shoes, which could open the door for another acquisition in the near future.

Another positive for the company is its outstanding sales force. When purchasing dress shirts or suits, experienced sales representatives usually present several ties, shoes or cuff links that will match each article of clothing. These upsell techniques have huge benefits, as most consumers shopping at Men's Wearhouse are normally in need of much more than just a simple shirt or tie.

Looking at the financials, Men's Wearhouse has a solid balance sheet, with $134 million in cash and only $82 million in long-term debt. Shares are trading at 15 times 2009 earnings estimates but are expected to grow by at least 15% over the next three years -- according to Capital IQ -- which seems conservative given the huge success of its recent acquisition.

Based on the constant demand for tuxedos -- which Men's Wearhouse has just begun to penetrate -- and management's long-term commitment to increasing shareholder value, I believe shares are headed to $60 in the short term, or 20% higher than the current price.

Kusick: Nice Pick but Don't Be Late to the Party

Men's Wearhouse has certainly been hot over the past year, handily beating analyst estimates in each of the past four quarters. Frank Curzio also ran down the myriad of metrics that have improved during that time, as well as the smart pickup of After Hours earlier this year. The result has been a 47% increase in the stock price since early September 2006.

Investors need to be careful in situations like this, in which a company hits a streak of "firing on all cylinders" and propels its share price. Most readers have probably heard the phrase "past results are not indicative of future performance." Well, with so many catalysts coming to fruition, the list of

future

drivers for the stock becomes shorter. In essence, the rocket starts to run out of fuel.

I'm not saying that shares of Men's Wearhouse are destined to fall. Frank is correct in pointing out the company's improved competitive position following the After Hours acquisition. My main concern is the amount of upside left given the higher expectations of analysts and investors, as well as the increased difficulty of delivering another exceptional year of results.

Earnings estimates for the current quarter are for 73 cents a share -- considerably higher than 90 days ago when the consensus estimate stood at 63 cents. The same is also true of full-year consensus earnings estimates, which increased to $3.02 from $2.84 just three months ago.

Going forward, the high earnings expectations aren't the only hurdle for Men's Wearhouse. Of the eight research analysts covering the stock, seven have ratings equivalent to buy or strong buy. As experienced investors are well aware, analyst upgrades can provide a nice boost for a stock, but it's difficult to get upgrades when everyone is bullish on your stock already.

Men's Wearhouse deserves kudos for delivering on its business plan and making a key strategic acquisition. But savvy investors know that it pays to be early to the party, getting in as the catalysts are just starting to develop. We've seen the Men's Wearhouse story unfold nicely -- it's certainly a solid company -- but I have to wonder what's left to push the stock to new highs. The answer is not much.

In keeping with TSC's editorial policy, Frank Curzio doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Frank X. Curzio is a research associate at TheStreet.com, where he works closely with Jim Cramer and and writes

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. Previously, he was the editor of The FXC Newsletter and senior research analyst for Greentree Financial, and passed his Series 7, 63 and 65. He appreciates your feedback;

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