Jos. A. Bank Clothiers (UNKNOWN:JOSB.DL) has built a strong franchise in upscale menswear, similar to like-minded competitor Men's Wearhouse (NYSE:TLRD), but it has been swimming against the tide of consumers' increasingly casual clothing preferences. Despite slow growth, the company is a profit machine that has generated a large net cash balance, roughly $370 million at last check, leading institutional investor BeaconLight Capital to question its capital allocation strategy. While Jos. A. Bank moved into the complementary tuxedo rental business in 2010, results of this specialty area haven't yet positively affected overall growth. So, is there an opportunity here for investors?
What's the value?
As the corporate world has shifted away from suits over the past two decades, Jos. A. Bank has adapted its product mix by offering more casual clothing options, principally through its Traveler Collection of dress shirts, pants, and sweaters. It was also one of the first clothing designers to market a "separates" collection of suit pants that customers could mix and match with suit jackets. Since the company designs virtually all of its product lines, it can quickly respond to changing consumer tastes, which has enabled it to grow sales each year and expand its operating footprint to more than 600 stores around the country.
In its latest fiscal year, Jos. A. Bank reported mixed financial results, with a 7.1% increase in revenue, but a 19.5% decline in operating income. Despite a rise in sales, led by a 23% gain in its online channel, the company's profitability was hurt by lower volumes in its retail stores and higher raw material costs, especially for wool products. On the upside, Jos. A. Bank has continued to gain participants in its discount corporate card program, with more than 500,000 companies at period end, which provides a strong base of consistent, repeat business.
Jos. A. Bank has been emulating its larger competitor Men's Wearhouse, which is also the country's largest provider of tuxedo rentals through its namesake stores and smaller tuxedo specialty shops. Men's Wearhouse has done a better job than Jos. A. Bank at diversifying its business mix, with a series of acquisitions that have given it a leading position in the corporate apparel segment in the U.S. and U.K. It has also been improving the efficiency of its stores by slowly closing its tuxedo specialty shops and bringing the business into its nearby Men's Wearhouse locations.
In its latest fiscal year, Men's Wearhouse reported slight growth, with increases in revenue and operating income of 4.4% and 7.1%, respectively, versus the prior year. While comparable-stores sales were strong at its namesake stores, up 4.8% for the period, the company's overall growth was hurt by store closures and flat results in its corporate apparel segment. However, Men's Wearhouse's drive for efficiency led to the highest operating margin of the past five years, which has generated strong operating cash flow and has provided funds for further expansion of its retail store network.
Hitting the ceiling
With Jos. A. Bank approaching its target market capacity of 800 domestic stores, though, it is going to need to think outside the box, rather than to just emulate its largest competitor. Clothing designer Oxford Industries (NYSE:OXM) made that decision years ago when it started to de-emphasize its historical roots in the men's tailored clothing segment in favor of a focus on casual brands. Through the acquisition channel, the company purchased niche lifestyle brands like Tommy Bahama, Lillly Pulitzer, and Ben Sherman, which now account for roughly 85% of its overall sales.
In its latest fiscal year, Oxford Industries reported a solid gain in its financial results, with increases in revenue and adjusted operating income of 12.7% and 8.3%, respectively, compared to the prior year. Oxford Industries' gross margin hit a five-year high as it enjoyed strong pricing for its upscale product lines and it continued to expand its retail store network, especially for its leading Tommy Bahama brand. While the company's operating margin was affected by its aggressive expansion plans, including adding administrative and marketing personnel in Asian growth markets, it is building brands that can be leveraged into high-margin licensing areas, hopefully providing a boost to its profitability over the long term.
The bottom line
Jos. A. Bank and Men's Wearhouse are carving up a profitable niche, but growth in the upscale menswear arena is likely to remain moribund, unless consumers' preferences do an abrupt about-face. Jos. A. Bank likely needs to pursue acquisition opportunities in the casual brand area, a la Oxford Industries, if it wants to reinvigorate its growth trajectory. Until the company makes a value-enhancing move with its cash hoard, investors should take a wait-and-see approach to this retailer.