Men's Wearhouse shops K&G business

Men's Wearhouse Inc. apparently doesn't like the way its K&G retail unit looks, as it has hired investment bank Jefferies & Co. to conduct a strategic review, including a potential sale.

The announcement late Wednesday, which included fourth-quarter and full-year results, sent the company's stock up 19% on Thursday, to a $34.62 close.

K&G's comparable-store sales declined 5.7%, a key reason behind the review, said CEO Douglas Ewert in the announcement.

"Sales at K&G were disappointing as customers did not respond to our promotions and new marketing campaign as well as expected," Ewert said. "Our board and management have embarked upon a process of re-evaluating the company's operating structure and capital allocation program."

The unit, which sells men's, women's and children's apparel, accounts for about 16% of Men's Wearhouse's sales, Ewert said. The executive added that the company's "core strength lies primarily in [its] MW and Moores men's specialty apparel retailing."

In some cases, strategic reviews of a unit can lead to a sale of the whole company. In December 2011 Charming Shoppes Inc. hired Barclays plc to shop its troubled Fashion Bug retail chain. By May, Charming Shoppes agreed to be acquired by Ascena Retail Group Inc. for $890 million. Ascena was interested mainly in Charming Shoppes' plus-size clothing retailer Lane Bryant and ended up killing Fashion Bug and put Figi's, another Charming Shoppes unit, on the block.

Men's Wearhouse and Jefferies & Co. declined to comment.

Men's Wearhouse co-founder and chairman George Zimmer held a 3.81% stake in the company as of April 2012, according to data provided by Thomson Reuters. Private equity teaming up with key management and/or family shareholders in a buyout has also been a trend these past couple of years. J. Crew Group Inc. chief executive Millard Drexler teamed up with private equity firms Leonard Green & Partners LP and TPG Capital to buy out the retailer for about $3 billion on Nov. 23, 2010. More recently, Ares Management LLC and Canada Pension Plan Investment Board partnered with the family of 99 Cents Only Stores Inc. chairman and founder David Gold, 79, and son-in-law CEO Eric Schiffer to acquire the retailer for $1.6 billion. The family held a 33% stake in the discount retailer.

Houston-based Men's Wearhouse had about $156 million in cash and cash equivalents, and no debt as of Feb. 2, according to filings with the Securities and Exchange Commission. The company has about $312 million in Ebitda for the year ended Feb. 2, according to Bloomberg.

According to those numbers, Men's Wearhouse has a modest valuation multiple of about 5.2 times Ebitda, making it an attractive target for private equity firms that would have plenty of room to add leverage to the company in a buyout.

Private equity has been willing to pay multiples in the high-single digits, or higher, for retailers. In the case of J. Crew, as high as 10 to 12 times Ebitda, according to an industry banker that worked on the company's buyout.

In addition to announcing the strategic review, Men's Wearhouse said it had approved a $200 million share repurchase program. It also said that total net sales for the fourth quarter ended Feb. 2 were up 8.2%, to about $608 million, while net sales for the full year increased 4.4%, to nearly $2.5 billion.

Men's Wearhouse had a net loss of $3.4 million for the fourth quarter, compared to a net loss of $3.8 million for the same period a year earlier. Net earnings for the year were nearly $132 million, compared to nearly $121 million for the same period a year earlier.

The retailer also plans to increase its revolving credit facility to $300 million to $450 million by mid-April. The facility would include a $100 million term loan to be repaid over five years, with 10% interest payable annually in quarterly installments.