"I wouldn't put it past Joe to pull a rabbit out of its three-piece suit, and present us with another earnings beat on Wednesday."
-- Me, Foolish Forecast: Money in the Jos. A. Bank, Sept. 10, 2007
One week ago today, I made the above prediction about the Q2 earnings report due out from Jos. A. Bank
Sales rose, as previously reported, a bit less than 13% to $134.3 million. Meanwhile -- while not reported, but as I predicted (this is called gloating) -- profits exceeded analyst expectations, rising a good 16% to $0.44 per share, diluted. While a far cry from the blistering 43% pace set in the first quarter of this year, that still leaves Joe with a respectable (to say the least) year-over-year earnings growth rate of approximately 30%.
How'd they do that?
Good question, and more importantly, an almost unavoidable question, considering the disclosure contained in Joe's press release -- or rather, the lack thereof. It seems Joe forgot that individual investors have jobs, and lack the time to dig through SEC filings or listen to conference calls in order to learn the "story behind the numbers." The press release was pretty skimpy, so I tracked down the 10-Q filing to dig in deeper.
So here's the story, as excavated from the innards of Joe's 10-Q filing with the SEC. Total sales rose less than 13%. We already knew that. What we did not know (remember, I was only guessing last week) was just how much better growth would be at the firm's high-margin direct sales (Internet and catalog) business, relative to growth at the retail store level.
The answer is that low-margin retail sales grew just 12%, while high-margin direct sales leapt 20% to an even $14 million during the quarter. When you recall that direct sales -- at an operating margin of 36.7% -- yield nearly twice the profit-per-sales-dollar of a retail sale, that's a significant difference. Despite this outsize growth in an outsizedly profitable segment, overall operating margins fell slightly from increased selling, general, and administrative (SG&A) costs. However, it still maintains a lead in operating margins over rivals like Macy's
While the stock was bid up 10% on the news, it still is selling at a discounted price compared to its competitors, as its P/E is still floating only a little above 12. If the company can continue to excel in its direct sales segment and maintain its wide margins, it would definitely be one to take to the fitting room.
Try on Joe's recent performance, and see if it flatters your portfolio: