The Men's Wearhouse, Inc. (MW - Snapshot Report) posted its third-quarter fiscal 2014 results, wherein its adjusted earnings of 83 cents a share dropped 7.8% year over year due to higher operating expenses. Earnings also fell short of the Zacks Consensus Estimate of 87 cents.

The Men's Wearhouse, Inc - Earnings Surprise | FindTheBest

Moreover, including one-time items, GAAP earnings for the reported quarter came in at 14 cents per share, down 82.3% from last year due to acquisition and integration expenses related to Jos. A. Bank.

Total net sales during the quarter advanced 37.3% year over year to $890.6 million. However, sales came below the Zacks Consensus Estimate of $909 million. The year-over-year rise was primarily driven by solid improvement witnessed in Retail segment sales, partly offset by a dip in sales at the Corporate Apparel segment.

Segment Performance

The Retail segment total revenue increased 42.3% year over year to $819.2 million, largely driven by the contribution of Jos. A. Bank, whose acquisition by Men’s Wearhouse closed in June this year. Also, the Retail segment’s sales were augmented by rising comparable store sales (comps) at all other retail brands of the company.

The Corporate Apparel segment revenues slipped 2.6% to $71.5 million.

Adjusted gross profit soared 32.9% to $390 million, while gross profit margin contracted 145 basis points (bps) year over year to 43.8%, attributable to weak retail margin on account of the initial Jos. A. Bank integration.

Further, adjusted selling, general and administrative (SG&A) expenses increased 28.9% to $262.2 million, owing to rising advertisement costs and acquisition expenses.

The increased gross profit led adjusted operating income to surge nearly 27% year over year to $85.7 million. However, adjusted operating profit margin contracted 80 bps over the same time frame.

Excluding Jos. A. Bank results, the company’s adjusted operating income showed low double-digit growth on the back of solid results delivered by Men's Wearhouse, Moores and K&G brands, all of which posted positive comps.

Other Financial Aspects

Men’s Wearhouse ended the quarter with cash and cash equivalents of $64.7 million, in line with last year. Long-term debt as of Nov 1, 2014 came in at $1,678.6 million with total shareholders’ equity of $1,035.7 million, compared to $90 million and $1,057.8 million as of Nov 2, 2013, respectively. Total debt at the end of this quarter included nearly $1.7 billion associated with the acquisition of Jos. A. Bank.

Merger Update

After several attempts, Men’s Wearhouse finally completed the acquisition of Jos. A Bank on Jun 18. As declared earlier, Java Corp – a wholly owned subsidiary of Men’s Wearhouse acquired all shares of Jos. A. Bank in an all-cash transaction at $65.00 per share.

We observed that the company is still in the nascent stages of Jos. A. Bank’s integration as it witnessed low margins and high costs related to the acquisition. However, management is pleased with the progress it is making with the absorption of this newly acquired company. Further, the company stated that cost synergies generated from this acquisition by the end of the quarter, were much ahead of the $15 million forecast made for fiscal 2014.

Apart from this, Men’s Wearhouse concluded its strategic review with regard to its K&G brand. After considering all possible offers, the company has decided to retain the brand as management expects K&G to provide highest value to shareholders among all other brands.

Currently, Men’s Wearhouse has a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include Pacific Sunwear of California Inc. (PSUN -Snapshot Report), with a Zacks Rank #1 (Strong Buy), along with Foot Locker, Inc. (FL - Snapshot Report) and Bebe Stores, Inc. (BEBE - Snapshot Report), each with a Zacks Rank #2 (Buy).

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