Value Investors Club / Joseph A Bank (JOSB)

Description

Joseph A Bank is a men’s business apparel specialty retailer that is unique in the specialty retail world in that business is strong in spite of the downturn:

· The company is growing earnings double digits with eps up 13% both YTD and in Q3. (I’m adjusted Q3 earnings to 44c from the reported 50c due to a lower tax rate.)

· It is generating positive mid-single digit same store sales (up between 6% and 7% in Q1, Q2 and Q3),

In addition:

· JOSB trades at 3.2 ev/ebitda. Though other retailers trade at a similar valuation, earnings at virtually all those companies are declining yoy, while JOSB’s are rising.

· Trades at a 7.3 p/e with no debt and $2.40 cash on the balance sheet.

· Trades at a 10.0% FCF yield to equity and 11.2% FCF yield to EV

The company reported Q3 earnings today while the market was open and will hold a brief call tomorrow morning. I say brief because they do not take questions.

The secret to JOSB success in 2008 lies with the fact that they are taking share among middle-class suburban men who, in spite of spending less on business clothes, are spending more at Joseph Bank due to a strategy that I believe differentiates their product in that it takes advantage of how men shop:

First, men want easy access to the store. Bank’s stores are generally not in large indoor malls making it easy for a customer to park and soon get in the store. Additionally, the stores have a classy feel to them, more so than Men’s Warehouse in my view.

Second, JOSB stores are generally better staffed compared to the men’s department at a department store and thus service is better.

Third, and most controversially, Bank’s high in-stock strategy means they carry more sizes and more of each size than other menswear stores which means when a customer shows up they are more often likely to have in stock what they need. This is critical because men defer their purchase until the item they seek becomes in stock. Instead, they go and get want they want elsewhere (that blue suit, that white shirt) in order to get the shopping project completed.

Also, Bank can carry a good portion of their inventory from season to season. This is because they design their own merchandise. So when they run low on a blue suit they simply order more to be made. A department store can’t do this because they do not design their own clothes. They have to clear the inventory each season. (Men’s Warehouse used to be like the departments stores, but is now does source more of their own product, but I believe it is still less than Bank.)

A fourth factor, and perhaps, most important, is that it takes a full three to five years for stores to mature. It takes that long for men in the area to realize that the store exists and to begin to shop. However, as stores have been added at a rate of ~50/year to current level of 460, enough stores are ramping up towards maturity and as they do they are goosing same store sales even in a downturn.

This is the third time I have written JOSB up in three years. My original July, 2006 write up details the story in great detail and should be read in conjunction with this report as the two together make a complete analysis. Among other things, that write up includes an explanation of the benefit of stores that take a long time to mature (see p4 of July 2006 pdf) and how this should benefit sales, margins and earnings for years to come. I believe in this environment the slow store ramp does more to help sales, but not much to help operating margin expansion. Operating margin expansion is likely being impeded due to a slower store-by-store sales ramp than what would occur in a better economy and it appears the company is spending more on marketing. However, when the economy turns operating margins should expand.

Other than that, since my initial write up and now and very little has changed except that earnings and same-store-sales have continued to rise quarter over quarter and year over year as valuation has continued to compress. In addition, the company’s modest debt has been paid off, cash is building and they even have enough cash to finance their own holiday inventory build and store expansion. Management continues to be ornery with the Street. This is a disappointment, but it has not impacted operations or profits.

Valuation:

TTM 2008 2009

Revenue 656,104 674,497 704,658

Rev growth 11.7% 4.5%

EBIT 89,406 91,800 97,282

DA 20,118 20,825 22,173

EBITDA 109,524 111,797 119,455

NI 54,507 55,495 58,369

EPS diluted $2.96 $3.01 $3.16

Price $21.50

Mkt Cap 396,912

Cash 44,452 72,372 112,716

EV 352,460 325,540 284,195

P/E 7.3 7.2 6.8

EV/EBITDA 3.2 2.9 2.4

I assuming 8.7% revenue growth in Q4’08, lower than the 13.7% they reported in Q3, and slightly weaker margins. 4.5% revenue growth in 2009. Frankly, I don’t know what to assume in this environment and if I told you I knew exactly what they are going to do I hope you would not believe me, thus I’m plugging in conservative numbers. If the economy ticks up even slightly, then earnings should expand sharply.

Risks:

If we’re headed for a Great Recession or a depression, then this stock will stop generating positive earnings and will make new lows. If you foresee such an outcome for the economy, then do not buy this stock or if you, do hedge it with another retailer(s).

Catalyst

Continued ramp of new and maturing stores and growth in same stores sales. Any improvement in the economy should cause earnings to rise much faster than they already are.

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			2008	2009
Price:	21.50	EPS
Shares Out. (in M):	0	P/E
Market Cap (in $M):	396	P/FCF
Net Debt (in $M):	0	EBIT	0	0
TEV (in $M):	0	TEV/EBIT