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JOSB AT A GLANCE

P/E ► 0   EV/EBITDA ► 0.487 VERY LOW ROA ► 13.5% HIGH ROE ► 20.4% AVG Debt to Equity ► 0.453 LOW Current Ratio ► 3.77 HIGH Interest Coverage Ratio ► 259 HIGH

 

 

 

 

 

 

Since 1905, Jos. A. Bank Clothiers, Inc. (JOSB) has designed and sold its own brand of classically-styled, high-end men's tailored and casual attire.^[1][2]

Unlike many of its competitors in men's specialty apparel, JOSB maintains large in-store inventories, ensuring that all sizes and styles are available for purchase.^[3] Coupled with on-site tailoring, this business model provides a convenient shopping experience for its intended customer base--male career professionals, a demographic that tends to shop for clothing only a few times each year.^[4] So far, this strategy has served the company well: though considerably smaller than many other men's specialty clothing retailers, JOSB reported a better operating margin at 13.7% than the industry average of 9.4% in 2007. ^[5] JOSB also reported a 13.7% increase in net sales for the third quarter of fiscal year 2008 with $149.3 million in total revenue, versus $131.3 million for the same period in 2007.

JOSB, however, remains vulnerable to the effects of 2008's particularly weak holiday season in its fourth quarter earnings report: compared to the 2007 holiday season, retail sales for the same period in 2008 dropped a record 9.8%.^[6] Previously, from 2005 to 2007, sales in the fourth quarter--that is, during the holiday season--accounted for between 53% and 58% of the company’s net income.^[7]

The recession is also impeding the company's efforts to expand. While management originally planned for 600 total stores by 2012, it has been forced to reevaluate this time-frame and has already scaled back the proposed expansion plans for 2009.^[8]

Business Overview

JOSB offers its apparel and accessories at "Three Levels of Luxury," the Executive, Signature, and Signature Gold collections, which all emphasize a classic, professional style.^[9] While it designs its clothing in-house, it relies on a word-wide network of vendors for manufacturing, with one agent sourcing 39% of all products in 2007.^[10] The company then distributes its products exclusively through its integrated retail channels, separated into two segments: (1) stores and (2) direct marketing, which includes both the Internet and its catalog.^[11]

Business and Financial Metrics

JOSB Key Operating Metrics Over Time^[12]

'	'	Gross Profit Margin	Operating Profit Margin	Profit Margin
2005		61.90%	13.30%	7.60%
2006		61.90%	13.40%	7.90%
2007		62.70%	13.70%	8.30%

Financial Discussion

For fiscal year 2007, JOSB posted $50.2 million in net income, a 16.1% increase when compared with $43.2 million in net income in the previous fiscal year.^[14] Company management attributes this growth to a 10.5% increase in net sales, resulting from a 0.8% increase in gross profit margins and sales increases in both retail segments.^[15] Operating costs, meanwhile, rose 0.4%, as the company continued to expand, opening 48 new stores in 2007 alone.^[16] Already, the expansion process has improved JOSB's key operating statistics: all three margins--operating, gross profit, and profit--and sales per square foot have improved over the past three years (Precise data for sales per square foot, however, is unavailable, since the physical expansion process makes the number hard to calculate accurately as an annual or quarterly figure.)^[17][18] The full profitability of these stores, moreover, remains to be realized: while half of the company's stores are less than three years old, they do not typically achieve company-wide sales and operating margins until their fifth year. ^[19] The company, furthermore, is financially stable: with $82.1 million cash-on-hand at the end of 2007, it holds no interest-bearing debt and has a $100 million open credit-line available through April 2010.^[20]

Contents 1 Business Overview 1.1 Business and Financial Metrics 1.1.1 Financial Discussion 1.2 Business Segments 1.2.1 Stores (87.5% of total revenue)[21] 1.2.2 Direct Marketing (10.5% of total revenue)[29] 1.2.3 Other (2.0% of total revenue)[34] 2 Key Trends and Forces 2.1 Impact of 2008 Financial Crisis: Declines in Consumer Spending and Confidence, Particularly During the Holiday Season, Disproportionately Hurt the Company's Potential for Revenue Growth 2.2 Impact of 2008 Financial Crisis: Recession Impedes the Company's Expansion Plans, Diminishing the Opportunity for Continued Growth 2.3 Fluctuating U.S. Dollar Helps Determine Import Prices for Raw Materials, Manufacturing Costs 2.4 Brand Profitability Depends on Prevailing Fashion Trends 3 Competition 4 References

Business Segments

Stores (87.5% of total revenue)^[21]

The stores segment includes all full-line company-owned stores but excludes the company's outlet and franchise-operated locations.^[23] As of the third quarter of fiscal year 2008, JOSB owned and operated 441 full-line stores throughout 42 states and the District of Columbia.^[24] In order to reach its target demographic of male career professionals, the company locates its stores in high-end, specialty retail areas, such as outdoor lifestyle centers, malls, and downtown business districts. Typically, company-owned stores offer on-site tailoring services to make the shopping experience as convenient as possible for its customers. In 2007, company-owned locations averaged 4,730 square feet, with new stores averaging 4,160 square feet.^[25] The average cost to open a new store was $500,000 with an average initial inventory investment of $300,000.^[26] Since 2002, the company has implemented an aggressive expansion plan, opening 25 new stores in fiscal year 2002, 50 in fiscal year 2003, 60 in fiscal year 2004, 56 in fiscal year 2005, 52 in fiscal year 2006, and 48 in fiscal year 2007.^[27] Through this expansion, JOSB posted revenues 10.5% higher for the stores segment in 2007 than in 2006.^[28]

Direct Marketing (10.5% of total revenue)^[29]

The direct marketing segment includes both the website and the mail-order catalog.^[30] JOSB uses these channels not only to process sales orders, but also to establish the Jos. A. Bank brand and collect information on its customer base: in 2007, the company shipped 9.4 million catalogs to potential customers.^[31] The website, furthermore, also augments the in-store customer experience: sales associates can fill customer requests with inventory available on-line.^[32] This segment posted 13.1% growth in net sales between fiscal years 2007 and 2006.^[33]

Other (2.0% of total revenue)^[34]

As of 2007, this segment includes the company's seven outlet stores and its 12 franchise locations.^[35] Typically, the franchisee and company have a ten-year agreement with an option, whereby the franchisee pays an initial fee and a proportion of net sales in exchange for the right to sell company merchandise.^[36] Outlets, on the other hand, are company-owned and provides the means necessary to liquidate excess inventory; due to the durable nature of the company's products, however, the company has been able to sell almost all merchandise through the full-line stores. ^[37]

Key Trends and Forces

Impact of 2008 Financial Crisis: Declines in Consumer Spending and Confidence, Particularly During the Holiday Season, Disproportionately Hurt the Company's Potential for Revenue Growth

In December 2008, U.S. retail sales fell for the six straight month, dropping 2.7% from November to December as a result of decreased consumer spending and consumer confidence in the wake of the 2008 Financial Crisis. ^[38] Clothing retail sales, specifically, dropped 2.5% over the same period.^[39] JOSB is particularly vulnerable to the effects of this recession: it not only serves a discretionary industry, but also earns a significant proportion of its annual revenue during the holiday season. ^[40] In the past three years alone, fourth quarter sales accounted for between 53% and 58% of annual net sales.^[41] This year's disappointing holiday season, therefore, threatens to weaken the company's potential for revenue growth: retail sales for the 2008 holiday season were a record 9.8% lower than 2007's sales for the same period.^[42] To combat these negative market pressures, JOSB has pursued aggressive discounting in an attempt to increase its market share relative to other men's specialty clothing retailers, even while the fashion market declines as a whole. On November 24, 2008, the company announced its Black Friday sales in advance in order to attract as many customers as possible: the Doorbuster event boasted sales of up to 75% on cashmere items at all of its full-line stores and on-line.^[43] Over the holiday season, the company even offered three suits for the price of one at some locations.^[44] Since the company has not yet released its 2008 fourth-quarter earnings report, it remains to be seen how JOSB's discount policy fared during a generally dismal holiday season for retail. Its 2008 third-quarter performance, however, set it up for the possibility of success: despite the recession, JOSB's continued expansion and promotions attributed to a 13.7% increase in net sales.^[45]

Impact of 2008 Financial Crisis: Recession Impedes the Company's Expansion Plans, Diminishing the Opportunity for Continued Growth

In response to the economic downturn, the company's management decided to reduce its capital expenditures by scaling back its proposed expansion plan, which originally called for 600 total stores by the end of 2012.^[47] Compared with the 40 new stores opened in fiscal year 2008, JOSB plans to open only 15 to 20 new stores in fiscal year 2009, as management expects fewer appropriate locations to be available for real estate investment.^[48] Appropriate locations require a high volume of retail foot-traffic, specifically composed of male career professionals--the company's intended customer base; with this recession, however, management expects decreased foot-traffic in such retail locations, rendering each possible new store less profitable than it otherwise would be. ^[49] For this reason, management not only decided to reduce expansion in fiscal year 2009, but also reevaluate the time-frame of the plan beyond that year.^[50] This change in the company's proposed real estate expansion plan has serious implications for the its future growth, as the opening of new stores has been a significant factor in the its past revenue growth, dating back to fiscal year 2002. ^[51]

Fluctuating U.S. Dollar Helps Determine Import Prices for Raw Materials, Manufacturing Costs

Amid the turmoil of the 2008 Financial Crisis, the U.S. dollar, as of January 14, 2009, has improved against most other benchmark currencies, resulting in decreased import prices.^[52] Since JOSB sources 88% of its products from foreign vendors (with 43% from China and 20% from Mexico in fiscal year 2007), import prices and thus the strength of the U.S. dollar relative to the currencies of vendor countries, specifically the Chinese yuan and the Mexico peso, are important determinants of company manufacturing costs.^[53] Faced with a relatively weak dollar in fiscal year 2007, the company relied on aggressive price negotiation to bring down manufacturing costs.^[54] A strengthened dollar, however, lets the company reduce manufacturing costs even further and, subsequently increase net income.^[55] Though the future trajectory of the dollar remains uncertain, JOSB, as an importer of manufactured goods, would benefit from a rising dollar^[56].

Brand Profitability Depends on Prevailing Fashion Trends

As a retailer for men's specialty apparel, the success of JOSB depends, in part, on fashion trends in professional menswear. The company insulates against this risk by using an updated classical look in all of its designs.^[57] Although men's business fashion has been resistant to any significant changes over the past half-century, the company did modify its designs in response to the increasingly casual corporate culture of the past decade.^[58]

JOSB continues to innovate in men's professional attire: in fiscal year 2004, it introduced wrinkle resistant polo shirts, wool pants, and suits as part of the "Traveler" collection.^[59] The following year, the company unveiled its "Stays Cool" suit, which, using specialized fabrics, keeps the wearer comfortable even in warm climates; it added more "Stays Cool" clothing items in both 2006 and 2007.^[60] With these innovations, the company exerts its own pressures on its competitors, creating its own trends in men's specialty fashion.

Competition

JOSB competes with other retailers and catalogers of professional menswear, as well as department stores that sell specialty men's apparel and accessories.^[61] These include:

Men's specialty retailers:

• Brooks Brothers - Privately-owned, Brooks Brothers operates about 180 full-line and outlet stores domestically, posting revenues of $260.2 million in 2007.^[62]
• Men's Wearhouse (MW) - Larger than JOSB, Men's Wearhouse operates 784 retail apparel stores and 489 tuxedo rental stores throughout the United States and Canada, as of 2007.^[63]

Department Stores:

• Macy's Inc. (M) - As of 2007, Macy's Inc. had 853 retail department stores in 45 states, the District of Columbia, Guam and Puerto Rico, with 22% of its net sales in men and children's apparel.^[64]
• Nordstrom (JWN) - Operating 157 stores in 28 states and the District of Columbia, Nordstrom focuses on high-end clothing and accessories, with men's apparel accounting for 18% net sales in 2007.^[65]

The following table excludes Brooks Brothers, Inc., since, as a privately owned company, no data are publicly available concerning its operating statistics.

2007 Operating Statistics Across Competitors in Men's Specialty Retail ^{[66][67][68][69]}

'	Inventory Turnover Ratio	Operating Margin	Profit Margin	Net Income	Revenue (Net Sales)
Jos. A. Bank Clothiers, Inc. (JOSB)	1.06	13.70%	8.30%	$50.17 million	$604.01 million
Men's Wearhouse (MW)	2.17	10.80%	7.00%	$147.00 million	$970.00 million
Macy's Inc. (M)	3.02	7.90%	3.40%	$909.00 million	$9,332.00 million
Nordstrom (JWN)	5.38	10.70%	8.10%	$715.00 million	$8,828.00 million

These data demonstrate a key feature of the JOSB business model: when compared with its competitors, the company holds relatively high in-store inventories, represented here by JOSB's low inventory turnover ratio. While unusual for retailers, these high inventories ensure a convenient shopping experience for the company's targeted customer--the male career professional. By focusing on superior service, JOSB posted better margins, as the table indicates, than its competitors did in 2007, despite its relatively small-size in terms of net sales and net income.^[70]

References

1. ↑ JOSB 2007 10-K, Item 1, pg. 1
2. ↑ Jos. A. Bank Clothiers - The Expert in Men's Apparel
3. ↑ JOSB 2007 10-K, Item 1, pg. 1
4. ↑ Vitaliy N. Katsenelson. Jos. A. Bank Outfitted Quite Nicely - Forbes.com.
5. ↑ CNBC Data
6. ↑ U.S. retail sales dive as economy slumps
7. ↑ JOSB 2007 10-K, Item 1a, pg. 15
8. ↑ JOSB 3Q2008 10-Q, Item 2, pg.13
9. ↑ JOSB 2007 10-K, Item 1, pg. 1
10. ↑ JOSB 2007 10-K, Item 1, pg. 3
11. ↑ JOSB 2007 10-K, Item 1, pg. 3
12. ↑ JOSB 2007 10-K, Item 7, pg.24
13. ↑ JOSB 2007 10-K, Item 6, pg.21
14. ↑ JOSB 2007 10-K, Item 7, pg.22
15. ↑ JOSB 2007 10-K, Item 7, pg.22
16. ↑ JOSB 2007 10-K, Item 7, pg.22
17. ↑ JOSB 2007 10-K, Item 7, pg.24
18. ↑ Vitaliy N. Katsenelson. Jos. A. Bank Outfitted Quite Nicely - Forbes.com.
19. ↑ Vitaliy N. Katsenelson. Ignore the Crowd: Jos. A. Bank Is Worth a Look -- Seeking Alpha.
20. ↑ JOSB 2007 10-K, Item 7, pg.24
21. ↑ JOSB 2007 10-K, Item 12, pg. F-23
22. ↑ JOSB 2007 10-K, Item 1, pg.4
23. ↑ JOSB 2007 10-K, Item 1, pg.3
24. ↑ JOSB 3Q2008 10-Q, Item 2, pg.13
25. ↑ JOSB 2007 10-K, Item 1, pg. 4
26. ↑ JOSB 2007 10-K, Item 1, pg. 4
27. ↑ JOSB 3Q2008 10-Q, Item 2, pg.13
28. ↑ JOSB 2007 10-K, Item 12, pg. F-22, F-23
29. ↑ JOSB 2007 10-K, Item 12, pg. F-23
30. ↑ JOSB 2007 10-K, Item 1, pg. 5
31. ↑ JOSB 2007 10-K, Item 1, pg. 5
32. ↑ JOSB 2007 10-K, Item 1, pg. 5
33. ↑ JOSB 2007 10-K, Item 1, pg. 5
34. ↑ JOSB 2007 10-K, Item 12, pg. F-23
35. ↑ JOSB 2007 10-K, Item 1, pg. 4
36. ↑ JOSB 2007 10-K, Item 1, pg. 4
37. ↑ JOSB 2007 10-K, Item 1, pg. 4
38. ↑ AFP. US Retail Sales Plunge in disastrous December.
39. ↑ U.S. retail sales dive as economy slumps
40. ↑ JOSB 2007 10-K, Item 1a, pg. 15
41. ↑ JOSB 2007 10-K, Item 1a, pg. 15
42. ↑ U.S. retail sales dive as economy slumps
43. ↑ MarketWatch. JoS. A. Bank Clothiers Makes Advance Announcement of This Year's After Thanksgiving Friday Doorbusters Focusing on Luxury Cashmere at Tremendous Values.
44. ↑ Reuters. December retail sales to spur profit warnings.
45. ↑ Liz Farmer. After good 3rd quarter, Maryland-based Jos. A. Bank Clothiers Inc.
46. ↑ JOSB 3Q2008 10-Q, Item 2, pg.13
47. ↑ JOSB 3Q2008 10-Q, Item 2, pg.13
48. ↑ JOSB 3Q2008 10-Q, Item 2, pg.13
49. ↑ JOSB 3Q2008 10-Q, Item 2, pg.13
50. ↑ JOSB 3Q2008 10-Q, Item 2, pg.13
51. ↑ JOSB 3Q2008 10-Q, Item 1a, pg. 22
52. ↑ Lisa Twaronite, Deborah Levine & William L. Watts, MarketWatch. Dollar up after grim U.S. data, Beige Book.
53. ↑ JOSB 2007 10-K, Item 1, pg. 7
54. ↑ JOSB 2007 10-K, Item 1, pg. 7
55. ↑ JOSB 2007 10-K, Item 1, pg. 7
56. ↑ JOSB 2007 10-K, Item 1, pg. 7
57. ↑ JOSB 2007 10-K, Item 1, pg. 7
58. ↑ JOSB 2007 10-K, Item 1, pg. 6
59. ↑ JOSB 2007 10-K, Item 1, pg. 7
60. ↑ JOSB 2007 10-K, Item 1, pg. 7
61. ↑ JOSB 2007 10-K, Item 1, pg. 9
62. ↑ Yahoo Finance. Brooks Brothers Inc. Company Profile.
63. ↑ MW 2007 10-K, Item 1, pg. 1
64. ↑ M 2007 10-K, Item 1, pg. 2
65. ↑ JWN 2007 10-K, Item 1, pgs. 3, 16
66. ↑ JOSB 2007 10-K
67. ↑ MW 2007 10-K
68. ↑ M 2007 10-K
69. ↑ JWN 2007 10-K, Item 1, pgs. 3, 16
70. ↑ Vitaliy N. Katsenelson. Jos. A. Bank Outfitted Quite Nicely - Forbes.com.