Those of you who have been with us for a few months probably know I’m looking at retail stocks and I generally like what I see, be it big like Wal-Mart (WMT) or small like teen apparel shops Aeropostale (ARO) and American Eagle (AEO).

The last week I’ve added two new retail stocks to my radar: Jos. A. Bank (JOSB) and Men’s Wearhouse (MW). Both are retailers of mens’ formal wear, and today Jos. A. Bank delivered a great quarter that handily topped estimates. There was some intraday volatility in JOSB, but the stock ended up more than 4% higher. I’m not writing off JOSB as a potential investment, but now I want to turn my focus to Men’s Wearhouse, which was down 1% and is just 3% above its 2-year low.

10-year Revenues, Courtesy Morningstar.com

Men’s Wearhouse has been a consistent performer at growing revenues, even considering the soft retail environment in late 2001 into 2004. Over the last decade, the company has averaged a return on equity of 14.3% without any significant leverage. Because Men’s Wearhouse operates on a very simple business model - selling suits and associated dresswear at reasonable prices - there seems to be less of the traditional risk associated with fashionable apparel companies, and I like the general discount nature of Men’s Wearhouse relative to bigger department stores like Macy’s (M), et al. Sales trends have generally held steady and are split about 50-50 between tailored clothing and casual wear, with only a slight shift (150 basis points) toward the latter since 2004. Similarly, margins have improved as the company has executed its sales strategy and gained additional scale; operating margins are in the low double-digits although they slightly lag those of Jos. A. Bank. Additionally, while 10-year average Returns on Equity are approximately equal for both Jos. A. Bank and Men’s Wearhouse, on a 5-year time frame Jos. A. Bank has a 23% ROE while Men’s Wearhouse has a 14% ROE.

One concern for Men’s Wearhouse is that its growth opportunities will be limited by store saturation; with over 540 Men’s Wearhouse locations, the company has stated it does not plan to press much beyond 600. Where will the growth come from then? In the recent past, the investment community as a whole has been disappointed by the integration of AfterHours (America’s largest tuxedo rental chain) into the Men’s Wearhouse family; the tuxedo rental business is highly seasonal so quarterly earnings may be unpredictable, but overall the strategy looks like a winner given that Men’s Wearhouse can leverage a national model against primarily local competitors.

So where does that put Men’s Wearhouse? At a market price of $1.67 billion, the company trades for an attractive 9.3x owner earnings. Of course, any stock can look good if the earnings are exceptionally high for one period, so how will the retail environment be near-term? Obviously some softness is expected, and Jos. A. Bank said on their conference call that Black Friday sales were strong but things moving into December have been sluggish… which brings to mind a recent conversation I had with my mother.

Mom: Have you done your Christmas shopping yet?
Me: No.

Male instinct is to delay necessary shopping until the last possible minute, so I don’t know why everyone is shocked that early December sales are on the light side. But in all seriousness, will Men’s Wearhouse beat next quarter’s estimates? That I don’t know - though I would feel comfortable investing in an established retail franchise that benefits from steady fashion trends and has good customer relationships based on consistently good prices, especially at single-digit multiples to earnings. Consider this a grown-up version of American Eagle (AEO): there seems to be a large incremental potential to drive profit gains from tuxedo rentals and cross-selling to those customers, and the professional sales staff at Men’s Wearhouse is a better bet than most, particularly in an uncertain retail environment. With recent stock purchases by both the CFO and the President, MW is a stock to watch - along with JOSB once the post-earnings volatility dries up.

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