Suit Seller's Stock a Good Fit for Value Hunters

Neither describes the Hampstead, Md., suit seller. Its growth has slowed but not stalled of late. And its present valuation of 8.5 times this year's profit forecasts is about 40% lower than the S&P 500 index median.

The company, in fact, turned up recently in my Takeover Targets screen. That's not to say there are bidders on the prowl. The screen merely looks for companies that generate an excess of cash and have low EV/Ebitda ratios. EV is enterprise value, the cost to buy all of a company's shares and pay off its debt, while putting its cash toward the purchase. Ebitda is earnings before interest, taxes, depreciation and amortization, a beautified profit measure that lends itself neatly to company comparisons. EV/Ebitda, then, is a company's takeover price relative to its earnings potential. Low ones suggest bargains. Jos. A Bank's ratio is 4. The S&P 500 median is 9.

I've recommended Jos. A Bank shares in the past, to my delight (at $11, adjusted for splits, in March 2003 and shame (at $39 in November 2005. The company sells its own brand of suits, separates, shirts, ties, coats, tuxedos and more through 426 stores and its web site. It offers three tiers of merchandise quality and uses frequent sales. (It would surely prefer constant ones, but in a 2004 lawsuit settlement with New York State's top prosecutor at the time, Eliot Spitzer, the company conceded that goods have to sell at full price from time to time in order for the reduced price to constitute a sale.)

Analysts say the clothes are a step up in quality from those offered at Men's Wearhouse (MW), which targets occasional suit-wearers instead of the businessmen Jos. A. Bank goes after. Two years ago The Wall Street Journal ranked the company's wrinkle-resistant dress shirts "Best Overall" in a roundup. I wear them, by the way, but given my fashion sense that's almost an anti-endorsement.

Yearly sales gains of 20% to 25% over much of the past five years have given way to an 11% increase in fiscal 2007 (ended Feb. 2) and forecasts for 9% growth this year and next. That's partly because the company has already set up in the choicest markets and partly because consumer spending has soured. But a comparison of Jos. A. Bank to peers suggests it is weathering the slowdown well enough. The company's same-store sales, which exclude the contribution of newly added stores, increased 3.8% last quarter, vs. a decline of more than 8% for Men's Wearhouse.

Jos. A. Bank is debt-free and has amassed $82 million in cash, equal to nearly a fifth of its market value. Don't expect dividends, though. The chain seems less defensive in its plans than other retailers at the moment. Management wants to add 38 to 48 new stores this year and has increased inventory to support both the openings and a marketing drive to increase online sales.

Plenty could go wrong. The economy could slow for longer than feared. Workers could shift further toward casual dress. Tuxedo tees could make a comeback. But the stock's current price seems amply discounted for all but the worst.

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