Jos. A. Bank: Where's the Cash?

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With controversy still swirling in the baseball air, my beloved Red Sox started their championship defense off with a loss last night. Here's hoping Boston's 25 will do a better job on Tuesday.

In the world of retail, Joseph A. Bank Clothiers (Nasdaq: JOSB) tore the cover off the ball this morning, turning in an earnings improvement of 50% over 2003's numbers. Jos. A. Bank accomplished this while turning in the third consecutive year of improvement in gross, operating, and net margins.

In fact, everything looks great as long as you don't look at metrics concerning cash. This is a continuing saga for Jos. A. Bank that we've mentioned a couple of times. Let's start with free cash flow. Last year, Jos. A. Bank turned in negative free cash flow, whereas this year it did manage to turn in $21.5 million, which is close to the company's net income of $24.5 million. However, almost all of this is made up of changes in working capital.

Applying the owner's earnings measure that is used by Tom Gardner in Hidden Gems reveals only $5 million in owner earnings. In fairness, Jos. A. Bank is opening many stores and this would mean large capital expenditures, which are going to decrease any measure of free cash flow.

What's more interesting about all of these new store openings is that they are really beginning to hit the company's cash conversion cycle. Jos. A. Bank's cash conversion cycle has continued to worsen each of the past three years, and it now takes the company more than 226 days to convert its inventory into cash. This is 61 days worse than two years ago, when Jos. A. Bank was converting inventory into cash every 165 days. The gremlin here is in "days inventory outstanding," which has increased each year, while accounts receivable and accounts payable have remained relatively steady. This is an area of concern for shareholders, because a company is not very likely to succeed if it can't collect the cash to pay the bills.

To get a really good picture of where Jos. A. Bank stands on its cash conversion cycle, it makes sense to compare it to competitors like Men's Wearhouse (NYSE: MW), Gap (NYSE: GPS), and Syms (NYSE: SYM). In the near future, I'll do just that, so come back soon for my follow-up.

Read more about retail in:

• Dressed for Success
• Show Me the Money
• Does Jos. A. Bank Measure Up?
• No Money in the Jos. A. Bank

Fool contributor Nathan Parmelee has no financial interest in any of the companies mentioned, but he does like a nice suit.