Is Jos. A. Bank Clothiers a Scam?

Alan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Current Price 43     PE 13     Ticker Josb

For purposes of this post I am using a straight forward definition of a scam. A scam is a dishonest plan, especially for getting money. I have attempted to discuss the company’s original sales prices, store sales and promotion practices and gross margins.  Management refused to co-operate in any way with regard to answering my inquiries.  I have about 25 years experience in the clothing industry and a broad understanding of the company’s business.  All the information I refer to is available from public sources, unless otherwise indicated.  I must emphasize that the opinions expressed and analysis shown are my own and not necessarily statements of fact.

Below is a five year history of the company’s income statement as published in its 2012 10K submitted to the SEC.

 

 

Jos. A. Bank (NASDAQ: JOSB) is an integrated menswear manufacturer and retailer of premium dress clothing for men.  Its business model as stated by the company, is to stick to classic clothing with little risk of markdown, to eliminate middle men in order to reduce cost of goods, to save on design cost by using in house designers, and because its product is not fashion oriented but predominantly classic to be able to buy in large quantities in order to get the most favorable prices from fabric mills and sewing factories, and shippers etc.. Virtually all of its products are produced overseas in cheap labor and fabric market countries.

Over the years it has expanded from its relatively small New York store base of around 20 stores as recently as 2004 to having over 600 stores in over forty states.  It has begun to open factory outlet stores which the company sees as opportunity for major expansion.  In addition the company has a growing website.

Sales increased from $605 million in fiscal 2007 to $980 million in fiscal year 2012.  Over the same period profits have increased from $50 million to a projected $97 million.

The company has a solid balance sheet with no long term debt and a strong cash position.  It also has a strong cash flow that has allowed it to expand its store base using internally generated cash flow. Gross profit margins have been remarkably strong and consistent over the years and have remained in the 60% range.

Currently selling at about $42 per share, the company's stock appears to be a remarkable investment opportunity given its appealing PE ratio.  One would assume that its success could be accounted for by either its ability to sell at very competitive prices to drive volume or its ability to create high margins by its manufacturing structure, or both.

The company advertises extensively on cable TV.  If one watches its ads and their frequency, it is obvious that their product is almost constantly on sale.  The discount on sales is usually in the range of 70% off. They also do promotions that ask you to buy for example one suit at regular price and get two free.  Some promotions are even more absurd and may offer three suits free plus two suits, free additional shirts or free ties.  This year they even added non apparel items to the package.

If you refer to the 10K you will see that this is not the first time the company has been accused of deceptive pricing practices.  In 2004 the company was accused by the District of Attorney of New York for deceptive pricing practices.  The company offered no defense and admitted no guilt.  However, they paid a $475,000 fine and signed a letter of Assurance, stating that they would abide by the FTC rules regarding fair pricing. They are now in discussion with the District of Attorney’s office, which is reviewing their compliance with the 2004 Letter of Assurance.  It is unclear to me whether new fines are possible, however, the company does state a new letter of Assurance may be in the offing and may seriously affect its marketing in New York. There is also a recent action started against the company in New Jersey and Georgia, states that are also looking into their practices.

At the time of the 2004 settlement Jos. A. Bank was selling about 1% of its product at the original retail price the company set.  Deceptive selling prices become an issue when merchandise is marked at prices way above fair market value while the company always intended to sell the product at much lower prices by using drastic markdowns and promotions.  The company must also demonstrate that it made a good faith effort for a reasonable period of time at the original price.  Markdowns and promotions should not be frequent and certainly not constant.  My contention is that they sold 1% of their product at regular price only because a regular price purchase was required in order to participate in promotions.

So what do we have at the end of the day:  A company which produces product year after year that it cannot sell at regular price, consistently marks the product down by about 70% and after that still earns a 60% gross profit.

It is my belief that this is a scam built on deceiving the public by initially deceptively pricing their merchandise at levels way higher than their market value and then using outlandish promotions and markdowns to promote the sale of the merchandise.  I believe their realized margins which are high to begin with, were the target margins the day the company decided to manufacture the products.

If the company were an honest vendor, they would have either changed their business model or gone bankrupt.

Here's How it is Done.

When a retailer reports sales, they report net sales after returns, allowances, markdowns, promotions, etc.  You don’t see the gross sale number.  I am first going to show a one unit model and then expand into a comparison to the latest 12 months, and fiscal 2011 and 2010.

Assumptions:

  • Jos. A. Bank's actual original selling price for a standard suit is $650.
  • Percentage of suits sold at regular price using 5%, although probably closer to 1%.
  • Suits sold via sale or promotion using 95%, although probably higher.
  • Cost of goods, imputed from Jos. A. Bank’s reported gross margins.  I am using 60% which should be near correct.

Gross Sale                             $650

Less 70% on 95% of Suit          432

Net Sale                                   218

Cost of Goods                           87

Gross Profit                               131

Gross Profit Margin                    60%

 

You can see clearly from my example that a $650 suit has an original cost of goods of $87.

One would normally expect the suit to sell for anywhere between $175 to $250 at retail.  There would also be returns, allowances markdowns etc. so that the final net selling price would be around $200. Jos. A. Bank is currently selling their $650 suit for $200.

 

Jos. A. Bank

Gross Profit as Reported to the SEC

Sales Net                      12 months                Fiscal                          Fiscal

                                    Ending 10/26/12      2012                           2011

                                    $1,040,833              $979,852                   $858,128

Cost of Goods                417,737                   371,577                      320,585

                                    --------------             -------------                ---------------

Gross Profit                   $623,096                 $608,275                   $547,543

Gross Profit                   59.8%                       62%                          63.8% 

 

Jos. A. Bank

Estimated Gross Sales and Gross Profit*                     

Gross Sales*                  12 mos.                     Fiscal                         Fiscal

                                    Ending 10/26/12        2012                           2011                  

                                    $3,127,500                $2,786,827                $2,404,388

Less markdown**

                                    $2,080,788                $1,853,240                $1,598,918

Net Sales                       1,037,313                  976,315                      885,593 

Cost of Goods                 417,737                    371,577                      320,585

 

Estimated GP                 628,975                      561,930                      484,885

Actual GP                      623,096                      608,275                      547,543

*Markdowns, Promotions, Returns and Allowances were assumed to be 70% on 95% of Estimated Gross Sales.

**The actual Cost of Goods reported to the SEC was used to create Estimated Gross Sales.

 

The estimates are remarkably close to the actual.  Working just from estimates of initial markups, markdowns, and percentage of goods sold at regular price, there is no way to get the estimates with actual results closer.  I have little doubt with the information necessary both the actual and estimated results would tie in.

At this time I could not find a direct match for Jos. A Banks. However, I am sure they must be out there.

I would not own Jos. A. Bank stock at any price.  If I were inclined to be a short it could be a good opportunity.


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