Call me old-fashioned: I like my suits dark and my stocks cheap. I may find a nice dark suit at Jos. A. Bank Clothiers
Fiscal 2006 was a good year, according to the company's earnings release. Total sales were up, same-store sales followed suit, and free cash flow was dressed to the nines. With record results (according to the press release) and the stock price increasing more than 70% off its 52-week low, I should be in the market to get a piece of the action, right? Nope. I need this stock like I need another dust-collector in my closet.
I shop for bargain stocks that know how to create value. I measure cheapness by discounting future cash flows to the present, and I evaluate value creation by examining returns on invested capital (ROIC). Let's check out ROIC first.
First, I must account for the operating leases. In my opinion, management doesn't get a free pass based on its financing decision to open a new store, particularly when that decision doesn't show up directly on the balance sheet. (It's in the note, and that's why the notes are so important.)
Using the 10-K Jos. A. Bank filed the day it issued its release (kudos to the company for this timely, comprehensive filing), I dug up the operating lease schedule and the other info to make my ROIC calculation. I calculate the company's adjusted ROIC at 12.5%, versus 12.1% the previous year. That's one test passed: Jos. A. Bank is creating value.
Free cash flow also grew very quickly compared to last year. Unfortunately, that's not likely to continue. The company's free cash flow growth is historically lumpy, given the way management runs the business. Peak-to-peak free cash flow growth has improved an average of 15% over the last two years.
Incidentally, at today's prices, that's what the market expects going forward. Is such growth likely to happen? It all depends on how quickly the company can continue to open stores, whether comps can continue to increase, and whether Jos. A. Bank can keep margins up. To me, this simply means that the stock offers no margin of safety.
With plenty of competition from Men's Wearhouse
For more on the companies making men look good, check out:
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Retail editor David Meier owns two suits right now, and they are doing a great job of collecting dust in his closet. He does not own shares in any of the companies mentioned. He is currently ranked No. 582 out of 24,488 investors in The Motley Fool's CAPS rating service. You can view his TMF profile here. The Fool takes its disclosure policy very seriously.