mens_wearhouse_logo1Event: The men’s clothing retailer reported earnings for the quarter ending October 31, 2012 on Wednesday after the market closed. Men’s Wearhouse (MW) said it earned 95 cents per share in the quarter; analysts expected 97 cents per share. Revenues came in at $631 million, matching expectations. Men’s Wearhouse also reduced guidance for its fiscal year profits, saying it now expects them to be the range of $2.57-$2.63 per share. Previous guidance had the company making a range of $2.74-$2.80 per share. Shares of Men’s Wearhouse are down some 8% in morning trading on Thursday.

Analysis: The report from Men’s Wearhouse  was not all that bad, but the downward guidance slammed shares. The retail sector is slipping at the tail-end of earnings season with a number of notable names showing weakness. The news from Men’s Wearhouse then is not all that surprising. Heading into the report, its shares were drifting lower, but still well above a 52-week low of $26 per share reached this past summer. With the selling today, the stock is now approaching those levels. At current, prices shares trade for 11 times the mid-point of the guided current fiscal year profits. Estimates for the next fiscal year are likely to be lower as well. Reducing the fiscal 2013 estimates by the same percentage as the reduction in guidance yields a profit growth number of 12%. No matter how cheap Men’s Wearhouse makes its suits, I personally believe the company to be fighting an upstream battle in men’s clothing trends. The suit is passé in a mobile world. I would play this one on the downside from here.

Action: Own MW Puts with a six-month expiration as shares are likely to drift lower over that time.

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