Joseph A Banks - Defying All Odds

Categorized | Featured, Long Ideas

Joseph A Banks – Defying All Odds

Posted on 15 April 2009

Investors in Joseph A Banks are simply not participating in the current recession. Over the past several weeks the stock has risen from a low near $20 to its current spot in the high $30’s. Most recently, the stock gapped higher after the company reported earnings for its fiscal year which ended Jan 31, 2009. While analysts expected the company to actually see earnings drop over the last quarter, the upscale clothing company had a surprise up its sleeve.

Earnings for the fourth quarter came in at $1.66 per share compared to $1.45 last year. The number was good for a 14% increase despite the truly challenging holiday season. While most retailers were struggling just to stay profitable (or even just to stay in business), JOSB was actually turning in robust growth. The strong fourth quarter left the company with record profits of $3.17 per share and sales of $695.9 million. Pretty impressive for a company that actually sells completely discretionary items!

Management had a clear strategy for this economic environment which paid off handsomely. While store traffic was weak for tha majority of the quarter, the company offered some exceptional promotions which were enough to drive sales and profits. During two particularly stunning one-day promotions, the company actually offered three suits for the price of one. It was creative promotions like this that actually made the quarter and in turn the year for Joseph A. Banks.

Its a bit unusual that while many companies were cutting costs in every area possible, JOSB was actually increasing their commitment to marketing. The company bumped up its ad spending in early 2008, and then midway through the year when economic clouds were circling, the company once again committed more capital. The end result was that the firm was able to gain market share, stay in front of customers, and quickly communicate the value it offered clients in each promotion.

Despite the spending, the company exited the year in excellent financial state. With $123 million in cash and no outstanding debt, management has the flexibility to pursue growth plans or play it safe and enjoy the position of strength. If history is a good predictor, I think we can expect management to aggressively pursue growth taking advantage of competitors difficulty with the retail environment.

Looking at the coming year, analysts are predicting the company to make $3.34 per share for the current year and $3.62 for the year ending Jan 31, 2011. Now after the last quarter’s out of the blue earnings beat, I’m unsure that the analysts really have a good bead on the company. The estimates may prove to be overly conservative. But even if the numbers are accurate, the stock is still trading at just over 10 times earnings.

While I have been cautious on most retail names, Joseph A Banks appears to be in an impressive place where the business is operating from strength, but the stock is priced attractively. So at this point even after the stock has run ahead on earnings, it seems one could buy the stock as a longer-term holding and expect to do quite well. When the economic picture begins to turn, the company should be able to leverage its firm foundation and expand its growth plans. Until then, I still expect solid execution and increasing sales and earnings.