Power suits
Jos. A. Bank seems to fit the very image of success, but there are questions.

By Andrea K. Walker
Sun Staff

Originally published October 19, 2003

The Baltimore Sun
http://www.sunspot.net

Tony DeSante would rather the word shopping not even be in his vocabulary and, until recently, he thought Jos. A. Bank Clothiers Inc. was the last place he would buy clothes. The 33-year-old hadn't been there since college graduation, when he bought his first business suit.

But one day during lunch last week, the federal employee was in a Bank store at F and 11th streets in Northwest Washington plunking down several hundred dollars for an olive-colored plaid suit and black dress shoes.

"I like the fit, it's easy to shop, and there's pretty good service," said DeSante, improving his wardrobe for a new job. "The suits are very business-like and conservative but not stuffy."

By attracting shoppers such as DeSante, the men's clothier based in Hampstead has pulled off a stunning transformation as the $84 billion apparel industry struggled. Its stock sold for less than $3 in late 1999 but climbed 17-fold, reaching $54.38 this month. The stock closed Friday at $42.90, down nearly 3 percent for the day, on the Nasdaq stock market.

Bank has doubled its outlets since 1999, opening its 200th store in San Francisco Friday. It plans to grow to 500 locations by 2007 as it makes strides on competitors such as Men's Wearhouse Inc. and Syms Corp. of New York.

The company's rapid rise in fortune has elicited skepticism among some analysts and investors. Questions have been raised about accounting practices, specifically how the company counts sales. The recent move by Robert N. Wildrick, the company's president and chief executive officer, to cash in 600,000 stock options has also caused some to wonder how much higher the stock can go.

"There's a lot of questions about their financials now," said Howard Davidowitz, chairman of Davidowitz & Associates, a national retail consulting firm based in New York. "I understand that they're expanding, but I think they may have gotten too optimistic about their business."

In the second fiscal quarter, which ended July 26, inventory levels at Bank jumped 75 percent, to $111 million from $47.6 million. Some analysts contend that is a signal the company isn't selling all the clothing it is ordering.

The company disputes that, saying it lost out on additional sales last year because it didn't have ample clothing in stock.

In a report filed with the Securities and Exchange Commission, the company said $19 million of the inventory is for stocking new stores and $4.1 million was summer wear that didn't sell. The remaining stock consists of raw materials such as wool, and merchandise used to beef up inventories from last year's levels.

"We feel very comfortable with the way we are positioned," Chief Financial Officer David E. Ullman said last week at the company's headquarters in Carroll County.

Bank executives said the company's jump in long-term debt - to $32.6 million for the 12 months ended July 26 compared with $9 million for the corresponding 12-month period - was also in line with their expectations as they buy merchandise to stock new stores.

"If we were to choose to stop opening stores tomorrow, within in a year we could pay off this debt," Wildrick said,

"They're an expanding chain, so they're going to have higher inventories," agreed Russell E. Hoss, an analyst with Roth Capital Partners in Newport Beach, Calif. "They have higher debt because of borrowing for higher inventories using their credit line." Hoss said he didn't think the Banks level of borrowing was egregious.

"I think it dovetails with a rapidly expanding company," he said.

The company's roots extend back to 1866, when Charles Bank immigrated from Lithuania and opened a small tailor shop in Baltimore. His grandson, Joseph A. Bank, joined as a cloth cutter at age 11 in 1898 and seven years later ventured out on his own as a clothes maker. He opened the first Jos. A. Bank retail store in Philadelphia in 1962.

Quaker Oats Co. owned Bank briefly in the 1980s but sold it to a group of investors. The company's fortunes fell as corporate casual dress grew before Wildrick was hired.

A Bank board member with 25 years in retail, Wildrick took over as chief executive in 1999. He embarked on a strategy that included improved attention to quality and cost-cutting at the company, which employees nearly 1,800 people.

To improve the company's image, Wildrick's management team created three lines of suits, to broaden its appeal to various shoppers, and spent $1 million on improving quality control.

A crooked stitch on a sleeve that might have been ignored previously is enough to get a suit returned to the manufacturing plant, as occurred with 10 Navy suits one day last week.

The company also began buying material for its clothes directly from the manufacturer, shaving 25 percent off the cost of making a suit.

Wildrick's decision to expand Jos. A. Bank while some national retailers cut back on men's clothing elicited favorable leasing deals from shopping center developers desperate for men's clothes outlets, analysts said.

"The malls are being very generous with build-out allowances," said Michael Via, an analyst with Anderson & Strudwick in Richmond, Va. "They want them in there."

Bank tends to open stores in areas with large disposable incomes, such as Tysons Corner in Virginia. It also prefers locations in open-air shopping centers near restaurants and "lifestyle stores" such as Ann Taylor and Home Depot, and with high volumes of traffic.

The Washington store where DeSante shopped last week, one of 40 new stores the company has opened across the country this year, is in the up-and-coming Penn's Landing area, near the famed Ford's Theatre.

J.J. Johnson, who works for the utility Pepco Holdings Inc. in Washington bought a trench coat at the store while attending a food festival nearby earlier this month. He returned a few days later looking for shirts and ties. "The quality of the clothes was so good, and the service was so good, I had to come back," he said.

Bank salesmen are trained to develop long-term relationships with their customers, calling them when an item they might like comes in or calling their spouse to recommend a gift around birthday-time.

"If we make you a loyal customer, we know you'll come back and spend $20,000 in our stores over the next 15 years," Wildrick said.

The strategy has worked so far, according to Bank's sales figures. The company's same-store sales - those at stores that have been open more than a year - were up 13 percent last month from September a year ago. Total sales for new and existing stores climbed 29 percent to $27.7 million from $21.5 million in the fiscal month ended Oct. 4.

Barron's magazine a week ago questioned the company's method of excusing from its same-store sales the figures for older stores within 10 miles of a new store. Bank executives say they do so because new stores can sap sales from an existing store. Critics contend that the method might mask stores that aren't doing well and make overall sales growth appear rosier.

"When people start looking at the numbers, the stock could see a huge down draft," said Michael Markowski, a researcher with stockdiagnostics.com, a financial Web site.

Wildrick also caused a stir during the past month by selling 600,000 stock options that were still years from expiration, generating $24 million.

The 59-year-old said he did so to diversify his investments as he grows older. After the critical article in Barron's, Wildrick announced that he will always own at least 100,000 shares of stock in the company as long as he leads it.

The executive now owns 101,000 shares and 388,000 options, or 7 percent of the company's total shares. Wildrick said he plans to continue adding to his shares in the future and wants to remain one of the largest individual shareholders. He sees no reason for the century-old clothier's recent success to wane.

"The world kind of gave up on the menswear business," Wildrick said, "but we looked out the window and nobody was wearing fig leaves."