Men’s Wearhouse Is Underrated Despite Success; Catellus Has Much Room to Grow

Men’s Wearhouse (MW)

Jim: Don’t buy

Mike: Buy

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Mike: I’ll start with this question about Men’s Wearhouse: Jim, would you say that George Zimmer is the Frank Perdue of the ‘90s?

Jim: No question, though some readers might not get the connection. Zimmer is not only the chief executive of apparel chain Men’s Wearhouse, he’s also its pitchman on TV and radio, just as Perdue flacked--or flicked--for his chicken company. And like Perdue, Zimmer’s very good at promotion.

Mike: Zimmer is the “I guarantee it” guy.

Jim: Right. But beyond his catchy advertising, Zimmer has also proved himself a capable manager. After helping with his dad’s coat business and getting an economics degree, Zimmer started the Men’s Wearhouse chain in 1974. . . .

Mike: With the first store in Houston. He expanded slowly in the 1980s, and his first California store was opened in San Jose in 1981. That was the chain’s first foray outside Texas.

Jim: Zimmer took Men’s Wearhouse public in ’92. Now the chain has about 460 stores and it owns some other chains under different names, such as Moore’s and K&G; Men’s Center. Altogether, the company has more than 600 shops.

Mike: Now, given that apparel is such a horrible business to be in most of the time, maybe you’ll be surprised to hear that I like this stock.

Jim: Yes and no. I like this company and the way Zimmer runs it, but I’m afraid I’m not wild about the stock.

Mike: You’re not wild about George, huh?

Jim: I like George just fine. I’ve been in some of his stores and he’s not kidding--the service is very good, he sells high-quality clothes and the prices are attractive. The company’s sales now top $1.2 billion a year, up from $483 million in 1996.

Mike: So what’s not to like?

Jim: My problem is that none of this is new, but the company’s stock languishes. It’s only a tad higher than it was a year ago, and no higher than it was two years ago. I don’t think Men’s Wearhouse is getting the respect or attention it deserves, either on Wall Street or Main Street. So as much as I like Zimmer’s operation, I’m not willing to fight the tape on this one.

Mike: Well, this raises the age-old questions: What do you do about a stock that’s underappreciated, and how do you figure out when Wall Street is going to wake up?

Jim: Good questions, and as much as I hate to admit it, Men’s Wearhouse pokes holes in one of the theories that I subscribe to about the stock market, which is that the market is very efficient.

Mike: You subscribe to that theory?

Jim: I do, meaning that the market is usually very good at quickly seizing all the trends swirling about a company and factoring them into its stock price.

Mike: Gee, you must be the only one left believing that.

Jim: Not so, and you know it. Anyway, I just don’t see any enthusiasm for this stock. It’s trading for only 12 times the $2.46 a share that analysts expect the company to earn in the fiscal year ending next January.

Mike: Another reason I like it.

Jim: But I worry that it would be dead money for a while. Here’s one reason I think investors aren’t thrilled with Men’s Wearhouse: As with all retailers, the company’s sales growth slowed sharply late last year. We’re always talking about retailing’s main measure being “same-store” sales, or sales at stores open at least a year. Well, Men’s Wearhouse same-store sales in December grew only 1.5%, compared with almost 6% a year earlier.

Mike: It’s pretty evident that Men’s Wearhouse had a weak fourth quarter, and we’ll probably see exactly that when it announces its financial results. And there’s no question that the company’s same-store sales were substandard. That being said, this week I’m going back to fundamentals.

Jim: Just this week?

Mike: I might change my mind next week. But listen, Zimmer has a good executive team, good fiscal management, a controlled expansion plan and good customer service.

Jim: Not to mention ads that grab your attention.

Mike: Right, and the stores make a lot of effort to help their customers learn how to dress well for the office. One of Zimmer’s arguments against his competitors is that you can walk into the men’s area of a department store and get absolutely no help doing anything from tying a tie to figuring out what to do with a collar stay.

Jim: You’re right: Service sets Men’s Wearhouse apart, as do its prices, which tend to run considerably lower than specialty men’s stores or department stores.

Mike: Exactly. I think investors are going to see all of this translate into another good year for the chain, and I see the stock as a buy.

Catellus Development (CDX)

Jim: Buy

Mike: Buy

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Jim: Some readers asked us to look at Catellus Development, Michael, and . . .

Mike: Are they investors or tenants?

Jim: Not sure. Anyway, with the renewed surge in development of California real estate in recent years, they wondered about Catellus’ outlook.

Mike: Good question, because Catellus is one of the largest land owners in California.

Jim: Precisely. It has something like 26 million square feet of commercial, office and retail space, and several residential operations.

Mike: The centerpiece of its holdings--the Trump Tower, so to speak--is a development in San Francisco known as Mission Bay, which is 300 acres in the city. Imagine what that’s worth!

Jim: Especially when there aren’t rolling blackouts there. Catellus was started in the mid-1980s as part of what was then the Santa Fe Pacific Railroad, which spun it off in 1990.

Mike: Right. In the old days the railroads were huge landowners because they acquired, or were given, land for their track rights-of-way.

Jim: And Catellus has been, shall we say, making tracks ever since.

Besides the Mission Bay project you mentioned, it also has a residential development in Chino Hills in San Bernardino County called Canyon Estates, and one in San Clemente in Orange County called Talega Gallery, to name just two.

Mike: One of the things that’s interesting about this company is that it appears to be a REIT--a real estate investment trust--but it’s not a REIT. It looks and quacks like a REIT, but it doesn’t have the burdensome structure of a REIT, which must pass through nearly all of its earnings to shareholders each year in the form of dividends.

Jim: In fact, Catellus pays no cash dividend at all. Yet the stock has pretty much traded along with REITs in general in recent years.

Mike: Right. Catellus had a nice rally in the first half of 2000, but hasn’t shown much since then.

Jim: And the stock is down about 9% so far this year. But to me the lower price makes for a better entry point for investors. What about you?

Mike: I agree. Catellus is a very nimble company, and Mission Bay alone is going to be a long-term development, almost like an annuity for Catellus and its investors.

And although there has been concern over rents and vacancies in the Bay Area lately because of--stop me if you’ve heard this one--the dot-com crash, the company is holding up well, and it’s certainly much stronger than in the early-’90s, when it was hammered by the state’s recession.

Jim: You raise a good point, because I’m a little concerned that, in light of the economy’s slowdown overall, Catellus might not get as many tenants as it wants, or get them as fast as it wants, or get them to pay the rents it wants.

Mike: But Catellus has an attractive, diversified real estate portfolio that ranges from commercial to residential, and I think those projects will stay very much in demand and generate hefty returns in the years to come.

Jim: They already are: In the nine months ended Sept. 30, Catellus’ profit shot up 82% from a year earlier. Yet the stock is only selling for nine times the per-share profit Catellus is expected to report for 2001.

Now, I know that Men’s Wearhouse’s low P/E didn’t get me excited, but, in this case, I see the cheap multiple as making Catellus a good value.

Mike: Agreed. There’s a lot of growth left in Catellus.

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Peltz ([email protected]) covers the markets and corporate financial trends. Hiltzik ([email protected]) covers technology and entertainment.