JoS. A. Bank Redux (JOSB)

By Edward Stavetski | September 12, 2006 AAA

Shareholders of JoS. A. Bank Clothiers (JOSB) have been on a wild ride as of late. As I wrote earlier this month, the company had lifted investor's hopes with strong sales numbers in July. Unfortunately, August did not provide a repeat performance. Sales for stores open at least one year fell 6.1% in August. Management also reduced earnings estimates for the 3rd and 4th quarter as well as for the full fiscal years of 2006 and 2007. The stock crashed on the news, falling nearly 20%.

Shortly thereafter, JOSB reported its second quarter sales and earnings. Sales for the quarter rose 20.8% and operating margins improved even as inventories increased about 8%. Only sales and marketing costs rose slightly faster than the sales rate, not necessarily a bad thing given that margins rose. Operating margins rose 80 basis points and net margins rose 43 basis points versus 2nd quarter 2005. That produced a growth in EPS of 26.7%. Additionally, JOSB has done an outstanding job of managing its balance sheet. Debt (outside of store leases) is virtually non-existent and return on capital has improved steadily since 2000.

Management set upon a plan several years back and they seem to be executing it very well. That is not to say that sales on a month-to-month basis will not be volatile. JOSB is still selling at only approximately 14 times earnings. The panic sell-off offered investors an opportunity to buy JOSB at an attractive entry price. JOSB seems to be building long-term value and recovered most of the recent sell-off. Investors need to evaluate stocks based on long-term objectives. As such, the earnings report confirmed that the value of JOSB remains intact, even though the market's short-term opinion of the stock appears to be anything but stable.

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