Why JoS. A. Bank's Profits Will Continue to Defy Gravity
Who cares if they are baggy, boxy, or (gasp!) even slightly shiny? The private label suits at Jos. A. Bank Clothiers (JOSB) are flying off the racks faster than you can say pinstripe. Ditto for ties, shirts, and other sartorial sundries as the men's wear retailer managed to post an impressive 10 percent sales gain and a sharp rise in gross margin which translated to a 38 percent increase in first-quarter profits. The question now: how long can Bank keep it up?
That's not to say a company can't continue to build on success. Bank's been around since 1905 and weathered the Great Depression and other economic slumps. Indeed, CEO R. Neal Black reported that Bank's achieved earnings growth in 34 of the past 35 quarters, making the current recession a mere blip on its radar.
It's the growth portion of Bank's future strategy that demands attention.
Over the past year, the retailer's made the most of deep discounting (Doorbuster: get a $1300 suit for only $388.50!) and special offers such as the "no interest for six months" deal when customers spend over $500. Black did concede that shoppers continue to demand "aggressive pricing and eye-catching promotions," especially now that buyers have shifted from purchasing pricier suits to sportcoats and shirts. He's also understandably concerned about the cost of cotton, which he described as "high and volatile" and could lead to the kind of price inflation that would erode margins on a range of apparel.
But Bank certainly has wiggle room even if cotton prices continue to increase. The retailer's balance sheet showed a 281 basis point improvement in gross margin, to 63.6 percent of sales.
The tricky part is how Bank is going to manage its proposed growth of a planned 30 to 40 stores this year. The retailer currently operates 473 stores and is looking for deeper market penetration to hit its larger competitor Men's Wearhouse (MW) head on in all segments, including tuxedo rentals. More stores could be easily slid into the considerable wealth of vacated retail space available across the country.
And Bank's proposed test of factory stores could also help increase market share. While my BNET colleague Carol Tice thinks this is a dicey strategy given such spectacular failures as Eddie Bauer's in a similar experiment, I think Bank's conservative play â€"- only five outlets in the first year -â€" would give the retailer a quick and relatively painless entrée into another market. Even big chains such as American Eagle (AEO) have been able to shut down underperforming new concepts in a hurry (think Martin + Osa, which AE opened and closed in less than 3 years).
Bank's on the money with another point: tailored men's wear doesn't have much of a presence in factory centers, so it would fill a need. And the customer is not the same guy as the one who shops regularly at his local Bank.
Image via josbank.com
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