Buy Joseph A. Bank, Get A Double Free?

By Stephen D. Simpson, CFA | September 07, 2010 AAA

Effective advertising is supposed to infiltrate the brain and prompt it to make certain leaps automatically. Go up to somebody who watches a lot of CNBC or Bloomberg TV and say, "Buy one executive suit," and see if they do not reply with something like "get the second suit and a silk tie, free". Jos. A. Bank (Nasdaq:JOSB) is by no means the only apparel company to offer that sort of sale, but one way or another it seems to be working for the company.

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The Quarter That Was
Total sales for the fiscal second quarter rose more than 12%, as JOSB saw same-store sales rise over 9% and direct marketing sales increase better than 12%. It is difficult to say exactly what the secret sauce here is, particularly as the company is doing a fair bit better with growth than its larger (and perhaps better-known) rival, The Men's Wearhouse (NYSE:MW). The idea that value-priced retail fills a niche during tough times is nothing new, but Jos. A. Bank does seem to have figured out a working formula with its merchandising and pricing strategies.

Below the top line, the improvements continued. Gross margin improved by more than a point from last year, suggesting perhaps that it can be tough to make money when a company offers three suits for the price of one, as JOSB did not so long ago. Moving on, the company did a good job of controlling its spending, and that led to better than 30% growth at the operating income line.

The Road Ahead
Grizzled value investors might remember Jos. A. Bank with a shudder, as this stock languished for years as a classic "value trap" more than once. Those who hung on, though, have been handsomely rewarded, as the stock more than doubled from early 2009, and is nearly a 10-bagger for those who bought (and held) in early 2002.

For the near term at least, it looks like conditions should be favorable for this company. Uncertainty about the job market is likely to keep steering aspiration shoppers away from Nordstrom (NYSE:JWN) and toward stores like Jos. A. Bank. Of course, it is never quite that easy - Macy's (NYSE:M) and most other department stores stock comparable merchandise and sometimes offer very competitive prices, and Men's Wearhouse is a well-known name for a good reason. Even still, do not underestimate the power of that branding - drilling that message into people's heads every morning might be the difference in a shopper walking into a JOSB store instead of a Dillard's (NYSE:DDS).

The Bottom Line
The long-term improvement at Jos. A. Bank seems like it should be a case study. From 2001 through present, the company improved its return on assets every year except one (when it fell back 0.3% in 2008). Profitability and book value has likewise been on a steady upward march for a decade. Although retailers can pull out a lot of tricks to make things look good (like opening a bunch of stores to boost sales and profits), it is tough to argue against hard-core fundamental improvements in profitability and overall shareholder value.

Jos. A. Bank trades at just a slight premium to its sector, even though its fundamental performance is more than just "slightly better" than its comparables. In other words, Jos. A. Bank once again looks like it might be a value. Keep in mind, though, that this entire sector is out of favor and the long history of JOSB stock suggests that investors buying with a value bent may have to have years of patience to see the story work out as they expect. (For more, see The Value Investor's Handbook.)

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