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Jos. A. Bank Clothiers (JOSB)

Jos. A. Bank is one of our consumer sector holdings currently as we believe that its low fashion risk business will have more reliable operating performance in the current environment where consumer spending is restrained by worries about a possible recession. Our current economic view is a bit different anyway as while we believe the economy will have slow growth in the first half of 2008 (zero to one percent) we do not share the concern that U.S. will plunge into a recession.

By the way, we also seem to have a bit less fear of what a recession means anyway (having survived four of them in my investing career, and without going hungry either!) as statistically a recession typically means that if before a recession that 102 people a day came into your store then during a recession probably 99 people a day now come into your store. Depending on the amount of financial and operating leverage a business may have, those three less people a day may be about as noticeable as paint drying.

Anyway, concerning Jos. A. Bank, they look like they may weather any economic storms pretty well as our financial models projects them to end this year with about $70 million in cash and no debt. As implied by that projection, cash flow generation is quite strong. Even with reasonable growth plans of ten percent square footage growth we still project the company to generate another $35 million of excess cash in 2008.

There is a controversy around the company, however, as inventory days are about 300 days but even with all that inventory they must be selling some of it to generate all that cash. Inventory days have also been around 300 days for five years now and are actually a principal component of how much the company's gross margins have expanded. In a business where they sell a lot of white shirts and blue blazers, a light bulb apparently went off one day in one of their executive's heads that if we have our stuff manufactured at much lower costs during off-peak sourcing seasons that we are probably still likely to sell all those white shirts and blue blazers at some point.

The opportunistic sourcing strategy has also helped support significant gross margin gains where merchandise gross margins are now around 62 percent. With such gross margins, it doesn't make much sense to have any stock outs and so I would be tempted to keep lots of inventory too. The inventory days have caught the attention of short sellers, however, as about 60 percent of the outstanding shares have been sold short - and have been for about three years actually. During that time, the company continued to gush out more free cash flow and so I guess the short sellers are so smart that they don't need to read balance sheets or cash flow statements.

Jos. A. Bank financial model

The views and research presented on these pages are not intended to be a recommendation of securities to investors. These represent our current views on the industries and companies mentioned, and our opinions are subject to change at any time without notice. We encourage investors in the Polynous Growth Fund to refer to the prospectus for a more complete description on the investment process, expenses and charges associated with the fund.
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