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Not all retail stocks are created equal

September 06, 2007 | About:
Vitaliy Katsenelson

Vitaliy Katsenelson

73 followers
Portfolio manager, CFA, Vitaliy N. Katsenelson shares his favorite retail stock: Jos. A. Banks

The housing bubble has burst, consumers are overleveraged, subprime mortgages are imploding,

hundreds of billions of adjustable rate mortgages are about to reset.

This doesn't feel like the time when you want to own retailers, right?

The answer is simple, depending on valuation. The retail sector has faced quite a selloff over last couple weeks as investors (for the right reasons) grew increasingly concerned with all the above issues.

Separating a good company and a good stock is the first thing anyone should learn when plowing into the investment world. Certainly, retail business will face hard times ahead. But in many cases the worst case scenario has been priced into the stocks.

My favorite stock in the sector is Jos. A. Banks (JOSB), a retailer of men's clothing.

In recent weeks the stock came down from mid $40s to $30 a share, putting its valuation at about 10 to 12 times earnings (depending on the time period you want to use for "E"). Economic slowdowns are not good for retail in general, but not all retailers are created equal.

Jos A. Banks is catering to a higher end demographic. The household income of its customers is well into six figures. Thus any economic slowdown should have a reduced impact on their shopping habits. Also unlike big ticket item retailers Best Buy, Jos. A. Banks' customer are less likely to finance their purchases by leveraging their house.

Under new management the company has embarked on fairly aggressive expansion strategy, more than half of its stores are less than three years old. As young stores mature their same-store sales and profitability increases, creating a profitable tailwind behind the company.

Last year investors (mistakenly) hated the stock because of company's unorthodox inventory strategy -- JOSB has grown inventory to levels of twice of their nearest competitor's Men's Warehouse. Despite Wall Street's cold reception that strategy has paid off as it lead to increase in same-store sales, higher margins and return on capital.

The good news, since late 2006 inventory growth has been lagging sales, management indicated that it is happy with its current inventory levels.

To add fuel to the fire, July same-store sales disappointed investors as they were down 6.4%, compared with expectations of a 1.4% decline. However, the monthly same-store sales have proved to be very volatile and are not predictive of what is to come due to the company's varied marketing strategies. Also, this July company faced tough comparison with 15.9% same store sales gains in July 2006.

There is no question that an economic slowdown will shave several percentage points of intermediate growth from the company. However, the current valuation prices in no growth at all -- an unlikely scenario.

My firm and I own the stock!

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Vitaliy Katsenelson, CFA is a portfolio manager at Investment Management Associates. His book "Active Value Investing" will be published by John Wiley & Sons this month.

About the author:

Vitaliy Katsenelson
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Comments

kfh227
Kfh227 premium member - 7 years ago
Bahhhh ... buy TJX or WMT or TGT
billytickets
Billytickets - 7 years ago
They are all not created equal .WMT ihas Kicked the crapp out of all of them in total sales and net income
pitbull4value
Pitbull4value - 7 years ago
> Under new management the company has embarked on

> fairly aggressive expansion strategy, more than

> half of its stores are less than three years old.

> As young stores mature their same-store sales and

> profitability increases, creating a profitable

> tailwind behind the company.

Pretty bold statement if you ask me! How many companies have you heard of that went on an aggressive expansion strategy that did NOT increase profitability? I know of one that went on a franchise buyback spree because they felt they could increase profitability by implementing "best practices" and did far worse because they couldn't integrate them. Instead of a "profitable tailwind" they got gale force hemorrhaging.

> Last year investors (mistakenly) hated the stock

> because of company's unorthodox inventory strategy

> -- JOSB has grown inventory to levels of twice of

> their nearest competitor's Men's Warehouse.

> Despite Wall Street's cold reception that strategy

> has paid off as it lead to increase in same-store

> sales, higher margins and return on capital.

Can somebody explain the relationship between these increases and higher inventory levels? Is it fewer out of stocks (lost sales) because of more inventory on hand?

> To add fuel to the fire, July same-store sales

> disappointed investors as they were down 6.4%,

> compared with expectations of a 1.4% decline.

> However, the monthly same-store sales have proved

> to be very volatile and are not predictive of what

> is to come due to the company's varied marketing

> strategies.

I thought he was trying to make the case that sales should be less volatile because their higher end customers would not be as impacted by housing / mortgage troubles?

This seemed more "hype" than analysis. If I were to consider JOSB, I certainly would have to look elsewhere for evidence as to why it's so good.

vitaliy
Vitaliy premium member - 7 years ago
1. Aggressive expansion strategy – the point I making that since its half of its stores are very new they have not reached their “mature” profitability thus margins are likely to expand further and same store sales to keep increasing.

2. I wrote several articles on JOSB over last year addressing that issue (please look them up at contrarianedge.com), but in short the answer is Yes. Customers visit their stores only couple times a year, larger selection (size wise) leads to higher sales and more satisfied customers.

3. This is an excerpt from one of the articles that address the issue of volatile sales: “JOSB’s marketing strategy is the weakest link in its business model. It is extremely short-term oriented and not about long-term brand building. I’d argue that it cheapens its brand. Where Men’s Warehouse’s (MW) “I guarantee it” commercials tell you about product quality and a pleasant shopping experience (long-term brand building strategy), JOSB commercials sound like it’s a cheap car dealership that you’d expect to see in the deep suburbs of nowhere land, with a very annoying voice that tells you something along the lines of, “Only this Tuesday, the whole store is 50% off!” But don’t worry, if you missed this Tuesday special, there are other days of the week; Wednesday, Thursday… you get the point. Yesterday, while reading JOSB’s latest 10Q, I heard the commercial at least three times on CNBC. This short-term driven marketing strategy is responsible for the volatility of same store sales.”

Again, articles on my website contrarianedge.com go into very in depth analysis. I did not want to write another in depth article on JOSB (I’ve written too many) and just to point out an interesting opportunity.

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