Wednesday, November 30, 2011

Wait For Market Break To Suit Up in Jos. Bank Shares

With unemployment at 9% do the out-of-work buy new suits to interview for scarce jobs or do they hold on to their dwindling cash and make do with their old duds? One way to answer that question is to look at the men's apparel retailers such as Jos. Bank (NYSE: JOSB) and Men's Warehouse (NYSE: MW) -- back in May I thought this one was too pricey. Should you suit up your portfolio with the shares of either company?

The men's clothing retailing industry is large -- $9 billion -- but it has gotten smaller in the last year at a 1.3% rate, according to IBISWorld. Behind this drop is the weak economy that crimps demand. As IBISWorld wrote: "Sinking consumer sentiment, brought about by skyrocketing unemployment and a slowdown in personal disposable income growth" cuts into demand for men's clothing.

However, IBISWorld expect the industry to grow slightly -- at a 2.3% annual rate through 2016 as the economy recovers.

And Men's Wearhouse and Jos. Bank are among the biggest players with market share of 20.2% and 10.3%, respectively.

Based on this analysis suggesting a tight link between the state of the economy and the change in sales at these men's retailing industry leaders, their recent financial results could well be a barometer of the state of the American consumer. 

And by that measure -- it looks like that consumer is in surprisingly healthy shape. Prior to Jos. Bank's Wednesday's earnings announcement, analysts expected a strong performance. They were looking for a 13.1% revenue boost to $196 million and EPS of $0.51 per share.

But Jos. Bank exceeded those expectations handily -- reporting a 21% sales pop to $210 million and EPS of $0.54 -- three cents more than expected. Behind the great results were a 14.6% increase in same-store sales and a 28.6% boost to sales from so-called direct sales.

When it last reported its fiscal second quarter, Men's Wearhouse did even better.Its adjusted EPS of $1.11 beat analysts' expectations by seven cents and its revenues climbed 22% to about $656 million thanks to its 2010 acquisition of two British corporate uniform companies and sales increases from its retail, tuxedo rental, and alteration business units.

So here's what the investment choice between Jos. Bank and Men's Wearhouse boils down to:
  • Jos. Bank: fast growing, good margins; fairly expensive stock. Jos. Bank sales have risen 11.4% in the past 12 months to $915 million while its net income rose 20.6% to $91 million -- yielding a slim net margin of 4%. Its PEG (where a PEG of 1.0 is considered fairly priced) of 1.29 is pricey on a P/E of 15.6 and expected earnings growth of 12.1% to $3.91 in fiscal year 2013.
  • Men's Wearhouse: growing, slim margins; somewhat pricey stock. Men's Wearhouse sales have increased 10% in the past 12 months to $2.3 billion, while net income has soared 47% to $95 million – yielding a slim net margin of 4.1%. Its PEG of 1.16 is slightly over-valued on a P/E of 15.1 and expected earnings growth of 13% to $2.49 in fiscal 2013.
I am not jumping up and down about either of these stocks. They are both a bit expensive but Jos. Bank has much wider profit margins than Men's Wearhouse. And that means that if its sales grow faster than expected, its earnings will grow even faster than the same sales growth boost would induce at Men's Wearhouse. 

I would look for a broad market dip to buy shares of Jos. Bank and hold off on Men's Wearhouse. But the good news for the broad economy is that if these two are bellwethers, their rapid sales growth bodes well for the future.


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