Jos. Bank's fast track raises some doubts

Rachel Sams
Staff

October 20, 2003

Baltimore Business Journal
http://baltimore.bizjournals.com

Three years ago, the stock of Jos. A. Bank Clothiers Inc. was trading in the $4 per share range. Under CEO Robert N. Wildrick, the company is growing the chain to 500 stores and bulking up inventory -- and its stock price has risen into the $50 per share range.

But over the past week, some industry observers have questioned the company's cash burn and its debt and inventory levels. What they are asking: Has Hampstead-based Jos. A. Bank (www.josbank.com), which built its name on blue suits and oxford shirts, gambled its future on an overly ambitious growth plan?

"If the company doesn't get its act together, there could be some problems," said Michael Markowski, director of research at StockDiagnostics.com.

The company, which predicted money troubles at Sears and Fleming Cos., a grocery supplier to Kmart, last week issued a warning on Jos. A. Bank stock, saying the company is reporting record earnings yet has negative operating cash flow per share -- a warning sign of trouble. Barron's followed with an article last weekend questioning the stock price's sustainability.

Jos. A. Bank officials say the company's spending on inventory and new stores is a prudent investment, not a gamble.

"As you're growing, stores need to add inventory," Jos. A. Bank Chief Financial Officer David E. Ullman said. "In our case, we're opening 50 stores this year.

"Of course, we're going to have more inventory than our most recent sales quarters can support ... We need a significant amount more investment just to fuel these stores."

The company's spending on inventory and expansion is part of the growth strategy it began nearly four years ago, Ullman said.

Over the past year, inventory levels at Jos. A. Bank have increased by $48 million, while the company spent about $23 million in cash on operations and debt rose from $9 million to $33 million.

"They're not generating enough cash," StockDiagnostics' Markowski said. "They've got a bunch of inventory that's not moving."

In its quarterly report, released in mid-September, the company reported having $725,000 in cash and cash equivalents as of Aug. 2. On Aug. 2, 2002, it reported having $8.39 million in cash.

Ullman disputes that, saying the company's inventory levels reflect key investments.

The increase, he said, includes nearly $20 million to stock newly opened stores and stores to open later this year; $9 million spent on fabric in an effort to reduce dependence on fabric suppliers; $4.5 million to replenish existing store inventory levels, which the company had cut back on after Sept. 11; and $5.3 million to ensure basic items are always in stock.

The company watched the market carefully after Sept. 11, ready to scale back if the economy couldn't support its growth -- but saw record quarters in late 2001 and early 2002, Ullman said.

Record sales growth has continued, with same-store sales up 13 percent in September. And even with all its recent spending, more than half of the company's $75 million bank credit line is available, Ullman said.

Some analysts don't think the company has overreached with its aggressive growth and spending. Michael M. Via of Anderson & Strudwick said he is "not bothered at all by all the scuttlebutt."

The company's stock is trading at about 20 times estimated fiscal 2004 earnings, which is "not at all out of line for a company with their growth rate," he said.

Analyst Preston E. Silvey of First Dallas Securities said Bank has grown at a reasonable rate in the past, and he expects that to continue. "I think it's doable," he said of the company's growth plan.

Another concern for some observers: stock sell-offs at the top. The Baltimore Business Journal first reported in August that CEO Wildrick had notified the Securities and Exchange Commission of a plan to sell up to 600,000 shares of his Bank stock. The plan said Wildrick would sell 50,000 shares per month through mid-2004 in roughly equal weekly increments. Under the plan, additional shares could be sold any time they reached prearranged minimum prices.

In recent months, Wildrick has sold more than 500,000 shares. For example, on Aug. 25, Wildrick exercised options to buy 10,000 shares at $3.41 per share, for $34,100. He sold off 10,000 shares throughout the day at prices ranging from $44.25 to $44.53, adding up to a profit of $443,450.

After StockDiagnostics and Barron's noted the sell-offs, Bank sent out a press release Monday saying that Wildrick had exercised stock options to increase his stake in the company to more than 101,000 shares.

Wildrick, the driving force behind Bank's growth, is a career retail executive. Before becoming Jos. A. Bank CEO in late 1999, he was CEO of St. Louis-based Venture Stores Inc., a publicly traded value retailer that liquidated in 1998.

At the time, Venture said it was liquidating because of fierce competition from chains such as Wal-Mart, Target and Kmart, a lack of capital and difficulties getting trade credit, according to the St. Louis Business Journal. Venture was already struggling before Wildrick joined the company in 1995. He is also a former executive at Belk Stores, a department store chain with outlets in the Southeast and mid-Atlantic. He began his career as a Macy's trainee.

The men's clothing industry has wobbled in recent years, as men have dressed more casually for work. "The competition is ferocious, and the men's clothing market is not exactly the healthiest in the world," said Kurt Barnard, publisher of Barnard's Retail Trend Report (www.retailtrends.com). "More upscale clothing is not in demand. That which is in demand is lower prices and casual clothing."

But Bank officials believe there is enough demand in the men's clothing market to support their growth, saying the workplace pendulum is swinging back to business dress after years of casual wear. And officials emphasize that while Bank is best known for upscale suits, the company offers casual clothing as well.

While industry observers such as StockDiagnostics' Markowski advise investors to "be cautious" in evaluating Bank, company officials say caution is built into their growth plan.

"If things got difficult," CFO Ullman said, "we could turn [inventory] around. We could turn it into cash very easily."