Anytime a stock falls 15%, most people sense trouble. I see opportunity. The markets generally overreact to individual earnings reports. Nowhere is this more evident than Jos. A. Bank Clothiers (NASDAQ:JOSB), whose stock tumbled 15% yesterday on the news it expects annual profits to drop by 20% due to unseasonably warm weather. The boo birds immediately brought out the knives.
A typical reaction, but that doesn’t make it right. Jos. A. Bank, on balance, is a good company. It will recover. In the meantime, its stock is on sale and may go even lower. As Carl Icahn reminded us this past week with his big gains on Netflix (NASDAQ:NFLX), it’s a good idea to buy stocks when everyone else hates them.
Warren Buffett approaches investing in a similar fashion. The more negative investors get about JOSB, the more excited I become. I might be the lone wolf on this one, but I like its chances at these prices. Here’s why.
According to Bloomberg, Monday’s drop was JOSB’s biggest in the past four years. Up until 2012, it had been on a bit of a run, increasing in value in seven of the previous 10 years. Just as important, it lost only 8.1% in 2008 compared to 37% for the S&P 500.
Successful investing is as much about preserving capital as it is growing it. With Monday’s fall, JOSB is now working on a second consecutive losing year, down 7.8% through Jan. 28. Long term (5-year and 10-year returns), it’s beaten the pants off both the index and its apparel store peers.
Very few stocks go up in a straight line. However, from its five-year low of $10.25 in November 2009 to its all-time high of $56.28 in May 2011, JOSB could do no wrong, rising 449% in less than three years. Whenever you get that kind of extended move and it comes to an end, it often takes a significant amount of time to regain momentum.
Certainly a 20% drop in annual earnings won’t help, but that’s business. It happens. I see this as nothing more than a necessary process before the next leg up. When that will happen is anybody’s guess, but if you buy now and then some more should it fall another 5% to 10%, you’ll do just fine in three to five years.
The Reality of the Situation
I won’t try to candy-coat the it. A 20% decline in annual earnings is never a good thing. According to management, the fourth quarter was a complete bust from a promotional standpoint. Much of its cold-weather items went begging as warm weather put a serious dent in its gross margins.
While I never like to see “the weather” excuse trotted out anywhere in an earnings report or guidance update, if management’s strategy was to sell lots of sweaters but temperatures were well into the 60s late into 2012, there’s not much you can do but move on.
Jos. A. Bank’s revenue in fiscal 2012 should be approximately $1.08 billion (its first fiscal year above $1 billion) with net income of $78 million. On a per-share basis it will earn $2.79, its lowest amount since 2009, when it generated $770 million in revenue.
It’s generating the same amount of earnings from 35% more revenue. Gross margins haven’t been this low since 2004. The 240-basis-point difference from 2012 to 2011 amounts to a 39% reduction year-over-year. I’m going to take management at its word that Q4 was a buying experiment gone bad and that Q4 2013 will see a return to gross margins above 60%. That’s the worst-case scenario.
The Bright Side
Jos. A. Bank’s direct-marketing business is slated to grow by double digits in Q4, suggesting fiscal 2012 revenue of $108 million, or 10% of the total. In 2011, its direct-marketing segment had an operating margin of 33.6%, 980 basis points higher than its retail stores.
Successful retail is all about multichannel distribution. Bricks-and-mortar retailers should be generating at least 10% of their overall revenue from online sales. If not, they’re providing customers with an unsatisfactory customer experience. Customers want to buy where, when and how they want. Jos. A. Bank is doing this.
Bank’s public peers include Macy’s (NYSE:M), Men’s Wearhouse (NYSE:MW) and Nordstrom (NYSE:JWN). JOSB trades at less than four times cash, which compares to an average of 11 times for its peers. If you subtract JOSB’s $11.71 in cash per share and use a 2012 EPS of $2.78, you get a P/E ratio of 9.9. If you believe as I do that 2012 is an aberration and its EPS in 2013 will once again be above $3 per share, then its forward P/E ratio (excluding cash) will be less than nine. That’s easily lower than all three of its peers.
It occurs to me that if you were to buy quality stocks only when they’ve dropped by 15% to 25% in a single day of trading, you’d accumulate a very robust and successful portfolio. Jos. A. Bank is in a rough patch at the moment. And it will have to regain the faith of investors in the first quarter and beyond before it can regain lost ground. It will, however, do so in due time.
Consider this one of its biggest sales in some time. These opportunities don’t last long.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.