I realize I'm probably one of the few folks out there taking a dim view on Jos.A. Bank's (NASDAQ:JOSB) earnings release today, but I see little reason for getting excited over this company.
Yes, Jos. A. Bank turned in stellar sales and earnings numbers, which the company trumpets at the top of its earnings release, so there's little need for me to repeat them here. The real story with Jos. A. Bank is on the balance sheet, which continues to worsen with each passing year that the company reports record growth.
A quick look at the numbers shows that the company now holds approximately 364 days' worth of inventory outstanding. This is up from 304 days at the end of 2004 and 285 days at the end of 2003. Some of this inventory build can be explained by the continual opening of new stores, but the fact remains that the inventory build has also caused the company's cash conversion cycle to lengthen from 206 days at the end of 2003 to 266 days now. Last quarter, the company had shown a bit of improvement on this metric versus the last four years, during which time it has steadily declined. But after six months, this year the trend is back in line.
In comparison, competitors Men'sWearhouse (NYSE:MW) and Syms (NYSE:SYM) have relatively stable cash conversion cycles over the last few years of around 100 to 120 days. Granted, neither is growing at the same pace as Jos. A. Bank, but Men's Wearhouse is showing growth and has a much healthier balance sheet.
Looking around the retail sphere, I'm hard pressed to find a retailer with a cash conversion cycle that approaches Jos. A. Bank's. Other retailers that are not direct competitors but, like Jos. A. Bank, sell merchandise that doesn't have a great deal of fashion risk, such as Gap (NYSE:GPS) and TJX Companies (NYSE:TJX), consistently have cash conversion cycles under 50 days. While Men's Wearhouse and Syms make for better comparisons, both Gap and TJX are struggling with sales growth, and TJX is expanding a few of its concepts. Still, both companies manage to keep the cash coming in the door quickly.
In my mind, where Jos. A. Bank really distinguishes itself is in its focus on the income statement above all else. It shows up in the language of the company's press releases and its annual report. Yes, the income statement is important, but the balance sheet and statement of cash flows are equally important, and investors should pay close attention to the changes in these two statements at Jos. A. Bank, because the inventory growth in excess of sales cannot continue forever.
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Nathan Parmelee has no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
