Men's Wearhouse: Why It's Time To Take Profits Ahead of Earnings

NEW YORK (TheStreet) -- It would be a gross understatement to say once-struggling apparel retailer Men's Wearhouse (MW) has seemingly turned around its fortunes and that of its shareholders, posting 2015 stock gains of 34%.

And not only are Men's Wearhouse shares crushing the broader averages this year, but the Houston-based suit specialist, which picked off rival Jos. A. Bank last year, is also dominating the 3% gains in the SPDR S&P Retail ETF (XRT), home to prominent retailers such as Costco (COST) and Home Depot (HD).

But how much more runway can there be in Men's Wearhouse stock? That is the question that investors must ask ahead of the company's first-quarter earnings results due out Wednesday after the close.

For the fiscal first quarter that ended in April, the average earnings estimate calls for earnings of 51 cents a share, down 26% from a year earlier, while revenue is projected to be 36% higher to $857 million. For the full year ending in January, the average earnings estimate of $2.87 a share would be an 11% year-over-year climb, while projected full-year revenue of $3.67 billion would be up 13%.

The prudent play here would be to take some profits off the table now and wait to hear what the company has to say about expectations for the next quarter and the full year.

Why? It has been feast or famine so far in the retail sector.

Even traditional powers such as Lowe's (LOW) have fallen prey to weak consumer spending.

But in the case of Men's Wearhouse, what is also important to consider is that the company isn't that far removed from its struggles, missing analysts' average revenue estimates three times in the past six quarters and twice in the past three. During that span, it has missed earnings two times.

And prior to the stock's 34% surge this year, Men's Wearhouse shares had plummeted some 31%, falling from a July high of about $49 to a low of $40.49.

Take a look at the chart:

MW Chart
Granted, the 30% decline in the chart was somewhat overdone, if not entirely underserved.

Men's Wearhouse was working to integrate the Jos. A. Bank deal. And this is something that will take a while longer for the merger synergies and cost savings to be realized.

This is what the market realized and promptly corrected Men's Wearhouse with a higher stock price.

Still, from my vantage point, it also implies the easy money on Men's Wearhouse shares have already been made. The harder part of the company's execution is about to begin.

For instance, though Men's Wearhouse did beat its revenue and earnings estimates last quarter, the addition of Jos. A. Bank, whose comparable-store sales declined 6.6%, negatively affected Men's Wearhouse overall totals.

In other words, in the Jos. A. Bank deal, despite the accelerated pace of merger synergies ($35 million run rate vs. forecast of $15 million) last quarter, it is tough to reconcile that as being enough to offset 600 basis-point declines in comparable-store sales.

This means that there are still deficits in the Jos. A. Bank brand that will pressure Men's Wearhouse's results in the months and quarters ahead, affirming why taking some profits off the table now might be a smart play.

This article is commentary by an independent contributor. At the time of publication, the author held no shares in any of the stocks mentioned.

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