The position initiated in Jos. A. Banks (JOSB) Common adds to a small basket of well-capitalized retailers that might credibly draw interest from private equity sources, but whose managements we expect to create value in their own right. Jos. A. Banks has been selling suits, shirts and other men's business wear for 107 years; but, it was not until the past decade that the company developed more of a nationwide presence, expanding well beyond its roots in the Mid-Atlantic U.S. While the company's promotional approach may be at odds with building a brand, management has compounded revenues at double digit growth rates over the past 10 years, while consistently delivering same store sales growth6 and margin expansion, even through the recent economic downturn.
Cash and equivalents comprise 20% to 25% of the company's current market cap, and the balance sheet is debt free. While the contractual obligation associated with operating leases are "debt like," we view it as eminently manageable and find additional comfort in the company's track record of profitability and excess free cash flow. The company does carry significant inventory, but unlike many apparel retailers, "fashion risk" seems relatively limited. Unlike the Fund's other apparel retailer holdings, the company's focus is on classic staples – including suits, dress shirts, and pants – that will be saleable next season or next year and likely look much the same as those sold five years from now.
Management prefers promoting their wares to both Main Street and Wall Street, rather than promoting their shares. Given the company's track record, we would say this has been time and energy well spent. Management believes they have room to expand their store base, and historically they have found numerous ways to profitably extend their product lines and otherwise grow sales from their existing store footprint. The next three to five years may not maintain the same trajectory as the past five; however, odds seem good that management can continue to compound value at attractive rates.
The Fund started its position at approximately 10 times earnings (adjusted for the company's cash holdings), a seemingly undemanding valuation for a business with prospects of continued growth over the near to mid-term. Shares also trade at a meaningful discount to what we believe a knowledgeable financial or strategic buyer might pay for control of the business.