Jos. A. Bank Impresses, but Is It Enough?


Men's clothier Jos. A. Bank surprised investors last week with better-than-predicted bottom-line earnings figures. The stock responded strongly, even though revenue missed estimates and net income was nearly half that of the prior year's. It goes to show that if expectations start low, anything other than terrible is great news. The company generates attractive cash flows and has expansion plans on the horizon, and the past year was the first in which the company surpassed $1 billion in sales. Has Jos. A. Bank turned the corner toward success?

Earnings recap
Jos. A. Bank's fourth-quarter and year-end earnings report showed a mixed bag for investors and analysts.

For the fourth quarter of 2012, net sales rose 2.5% to $354.8 million, contributing to that $1 billion in total annual sales -- a milestone for the company. Net income surpassed analyst expectations, hitting $28.4 million, or $1.01 per share. The Street had been expecting $0.98 per share.

As a whole, 2012 net income fell 18% to just under $80 million, implying a net income margin of 7.9%. Even though sales topped $1 billion for 2012, the prior year's $980 million led to record net income of $97.5 million.

Same-store sales ended the year down 0.5%. For the two prior years, same-store sales grew more than 7 percentage points.

On the bright side, the company saw tremendous growth in its online business, with a more than 22% year-over-year sales increase. The segment is likely to continue driving growth, even while the company expands its bricks-and-mortar business.

Currently, management says sales are up, compared with last year's Q1, but continued pricing pressure has kept the company cautious regarding guidance.

Outlook and valuation
As management pointed out, Jos. A. Bank needs to boost its gross margin to prop up net earnings and cash flow. Marketing expenses for 2012 increased $36.9 million from 2011, representing a 9% boost, while sales ran up just over 7%. The company's advertising initiatives, which are crucial to discern itself from competitors such as Men's Wearhouse, need to yield stronger returns in coming quarters and for the year.

Capex for the coming year is projected to be in the neighborhood of $42 million to $46 million, a substantial increase over the prior year. This is due to the company's expansion efforts in bricks-and-mortar stores (40 to 45 new stores), and some infrastructure improvements. Investors should look toward the back end of the year to see how these efforts have played out, and to determine whether the ROI for the new stores warrants the increased expense.

At 12 times forward earnings, which comes in higher than Men's Wearhouse (similarly troubled), and with an EV/EBITDA ratio of 5.11, Jos. A. Bank is on the cheaper end of specialty retailers, but not cheap enough for bargain hunters looking for a turnaround play. More compelling may be Men's Wearhouse, which is shedding its discount segment and doubling down on the original products that made it a success. The company is also a potential takeover candidate given its valuation and the current M&A environment.

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