It's not a recipe that many retailers follow, but loads of inventory and steep discounts seem to be working well for at least one clothier. Men’s clothing retailer Jos. A. Bank (JOSB) reported record profits for fiscal 2009 due in large part to aggressive promotions attracting greater foot traffic to stores. The company released annual results on Wednesday that the company earned $71.2 million or $3.84 per share, which is 22% better than a year ago results. They achieved this earnings growth with sales roaring ahead 11% to $770.3 million. Jos. A. Bank blasted through analysts’ estimates of $3.70 on $753 million. Same store sales advanced 6.3% and direct marketing sales grew by 12.2%. Clearly, the stock outperformed expectations and it is trading more than6% higher in early afternoon trading. Today, JOSB stands at its all time high and the first time it has crossed the $1 billion market capitalization threshold.
The company declined to offer fourth quarter results until tomorrow, but it is not difficult to back out the results from the annual tallies. Fourth quarter earnings represent about half of the annual net income, so we can assume it was somewhere around $36 million or about $1.97 per share, which easily exceeds analysts’ estimates of $1.79. Jos. A. Bank also said fourth quarter sales were about 36% of the annual revenue, so we can deduct sales were near $277 million, again far better than expected and 11% growth from last year.
The past quarter appears to have been a success all the way around, and sales of signature suits were particularly strong. Jos. A. Bank slowed new store openings to a rate of just 14 last year, and instead focused on retooling their online presence. They had been opening more than twice that number of stores prior to the recession, but as the results attest, growth did not suffer. Online sales were a big reason why, as they increased by 26% in the fourth quarter to represent nearly 10% of the total, according to an analyst at Sterne, Agee & Leach. Inventory–long a concern from sell side analysts of JOSB–was constrained, only growing by 4% which is not really a concern considering the outstanding sales growth. However, management has a reason for their high inventory levels, as they want to make sure to capitalize on each time a man steps foot in their stores. Most men only make a few shopping trips a year, and are not likely to return for an item that was not immediately available. Also, men’s fashion is about as stable as anything in retail, and odds are a suit will still be highly sellable months or even years after first entering a store.
At Ockham, we are maintaining our Fairly Valued rating on JOSB as of this week’s report, but may consider an upgrade on any pullback. The company is clearly executing well in a rather difficult environment, but the stock has thus far kept pace as far as our methodology is concerned. For example, JOSB has normally traded for a price-to-cash earnings of 6.7x to 14.6x, and the current metric is right in the middle of that range at 10.8x. Furthermore, the current price-to-sales per share is about 1.31x which fits right in with the historically normal range of .71x to 1.54x.
Jos. A. Bank has demonstrated its ability to adapt and succeed in a truly difficult economy over the past year, and shareholders have been rewarded handsomely as JOSB has almost doubled in the last twelve months. This builds on a tradition of growing earnings in 33 of the last 34 quarters (and 15 in a row). In addition, they continue to strengthen their balance sheet with strong cash flow and zero debt. The valuation does make us a little bit wary, but value investors should keep this one on their radar screen in case of a pull back.