Barron's Rags on Jos A. Bank

Barron's Bill Alpert isn't impressed that Jos. A. Bank Clothiers' (JOSB) suits never seem to go out of style. Maybe if they did, the chain wouldn't have such a massive inventory -- 425 days worth at last count. Rival Men's Wearhouse (MW) holds a more modest 292 days.

Same-store sales are growing by just 4%, down from 10% growth two years ago. Alpert notes that after 2005, JOSB stopped using a method that inflated its comps, which may account for the drop, and may be the reason the company refused to respond to his inquiries. Since January, Bank stopped reporting comps altogether.

Despite shares trading at less than 10x earnings, Alpert suggests investors steer clear:

Despite any seasonal improvements, the trend of Bank's comps and inventories is worrisome. A shareholder suit could cast light on those trends. A small earnings shortfall back in 2006 knocked the stock for a loop, leading to a securities class-action suit in Baltimore's federal district court. Plaintiffs alleged that Bank inventories were bloated; filings include a company memo dated April 8, 2006, that told store managers that weak sales had put the company "in CODE RED mode" and ordered managers to work six days a week. CEO Wildrick sold over $35 million worth of stock in the months before the chain disclosed its disappointing earnings for the April 2006 quarter. Wildrick and other company executives have denied wrongdoing and asked Judge William M. Nickerson to dismiss the suit. But in September, the judge allowed the suit to proceed... Stephen Bainbridge, a professor of securities law at UCLA, says he'd be surprised if the judge denied class-action lawyers a chance to conduct their own discovery into the retailer's inventory practices. That discovery could show investors a lot more about Bank's timeless inventories.

Barron's bottom line: Shares ($23) could fall to $16.

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Alpert's not the only one who's betting against Jos. A. Bank. Its shares are a huge favorite of short sellers.

Shockingly so: Of 18.17 million shares in its float, an astounding 15.2 million, or 83.5%, are being sold short. What this means is this: If Bank disappoints, a lot of happy shorts are going to want to unwind their positions. At an average volume of 900K, that's about 17 days of trading. But if Bank comes out with good news, or even news that isn't as bad as the Street expects, short covering could get violent. Something to keep in mind.

Comments

[User 170298]

Can anyone shed light on these inventory calculations ?

JOSB - q end cgs-47,679,000/90 =529,766

inv- 225,000,000/529,766 ==== 425 days - is that what he is doing ?

[Brian Harper]

Yeah that looks right. One issue is that inventories are always seasonally highest in the 3Q ahead of the holidays...at 2Q they were $196m, 1Q $180 mil, 1Q, and $184 mil at year end 2006.

Also inventories at the end of the 3Q...at 225 mil, were up 11% YoY, about the same as their sales...I don't see the big issue here. Of course Barrons is in the business of selling magazines...

As one analyst of the co told me "this is a stock that the street loves to hate..." partially b/c management doesn't give guidance and doesn't take Q&A on the conf calls.

[DanielJacome]

The stock had a massive short squeeze exactly a year ago, that too may have been on the minds of Barron's editors as they put this together.

[B]

Does anyone else seem to think that it is too coincidental that right after JOSB short interest rises to 15.2 million, 86% of the float, that a small article appears in Barron's talking down the stock. As a Regulation Sho stock how is it possible that clearing firms are finding borrow on the name?

[heterocedastico]

Comments by management today on inventories:

"Total inventories were approximately $207 million at the end of 2007, which is about $23 million higher than at this
time last year. This represents an increase of 12.7% in total inventory compared with last year, which is relatively
consistent with the 10.5% sales increase in '07. The trend of increase is consistent with our discussions in prior
quarters, whereby we stated that we expected year-over-year total inventories to increase in the single digits or in the
teens in '07. The inventory growth has been to support new stores and to build inventory in certain core categories. In
addition, if you review the past two years, our sales have increased approximately 30% from 2005 to 2007, while our
inventories have grown 17% in the same period."

[SA EditorEli Hoffmann]

That's very useful info, heterocedastico. Do you have a link?