By Douglas Gerlach
Investor Advisory Service
Many retailers have seen the market for their goods and services contract during the recession. The sale of men's suits is no exception. However, Jos. A. Bank Clothiers Inc. (Nasdaq: JOSB), a maker and retailer of professional clothing for men, has continued to grow.
Jos. A. Bank focuses on what it calls the "Four Pillars of Success." These are 1) Quality, 2) Service, 3) Inventory In-stock, and 4) Product Innovation. The firm tightly controls its own sourcing and production of merchandise such as tuxedos, suits, shirts, vests, ties, sport coats, pants, sportswear, overcoats, sweaters, belts and braces, socks and underwear, and other classic professional items. The company believes this tight control allows it to keep quality high while providing value at modest prices.
The firm employs a commissioned, salaried sales force at its stores to provide top-notch service. Since styles change slowly in the male professional clothing market, Jos. A Bank keeps abundant inventory on hand so customers have a wide variety of choice. The company has responded to changing fashion tastes over the years through the introduction of new product lines such as the "Three Levels of Luxury" suit assortment (the original Jos. A. Bank Executive collection, the more luxurious Jos. A. Bank Signature collection, and the top of the line Jos. A. Bank Signature Gold Collection) and Vacation-In-Paradise line of casual vacation wear.
Roughly 90% of the firm's sales are recorded by its 474 stores spread across 42 states. The other 10% are made through its catalog and over the Internet. To fight the recession, the firm has increased promotional activity over the past year. This has reduced the average total amount per sale, but new customer traffic has led to additional sales. Both quarterly sales and earnings have grown consistently, including 14 straight quarters of earnings growth through the third fiscal quarter of 2009. Sales year-to-date are up 9.7% and the company has managed to post a 4.6% advance in comparable store sales (sales from stores open more than a year). Earnings for the same period have grown 27% due to tight cost controls, reduced rents and lower costs of raw materials.
Jos. A. Bank expects to grow through opening new stores and expanding its assortment of clothing. The company believes it can grow to 600 stores in the 2012-2014 timeframe. Typically the firm opens 30-40 new stores per year, but during Fiscal 2009 the company reduced this pace to an expected 15 new stores. For Fiscal 2010, the company projects its normal store opening pace of 30-40. The company has ample free cash flow to fund store opening costs.
The firm announced in January that it will test market renting tuxedos in 5% of its stores. According to the company, the tuxedo rental market is $1 billion of sales annual. If the pilot is successful, Jos. A. Bank intends to roll out tuxedo rental to 50% of its store base in the spring of 2010 and the rest of its stores by Fiscal 2011. The firm will minimize its financial risk by using a third party vendor to provide tuxedos and distribution to its stores. This sounds like a low risk strategy that could lead to nice incremental growth.
The men's professional clothing market is highly competitive. In addition to large department stores like Macy's, Jos. A Bank competes with other niche makers and retailers such as Brooks Brothers and The Men's Warehouse. Jos. A. Bank has performed well when compared to The Men's Warehouse, as the latter has seen sales and earnings decline through much of the recession.
For the next five years, we estimate annual sales and EPS growth of 12%. Five years of this growth could lead to EPS of $5.66. Using the average high P/E ratio over the past five years of 18.2, the potential high price is 103. If these results come to pass, the annual appreciation could be as high as 20.3%. The downside risk appears to be 29% to 29, the product of the average low P/E over the past five years of 9.0 and Fiscal 2008 EPS of $3.21.
Editor's Note: Douglas Gerlach is editor of Investor Advisory Service, published by ICLUBcentral Inc., 711 W. 13 Mile Rd., Madison Heights, MI 48071. Monthly, 1 year, $399. 1 year, E-subscription, $299. www.iclub.com/IAS.
