Jos. A. Bank To Costs To Rise As Cotton Prices Continue To Rise

Jos. A. Bank's JOSB rising raw material costs were a key topic at investor meetings which Sterne Agee sponsored. While wool-based (tailored) goods are about half of its line currently, cotton comprises about one-third of its sales. Wool costs are up about 10% while cotton is up 70-80%. JOSB will begin to face higher cotton costs with the arrival of the spring line late in Q4 into Q1 and this will be more impactful in Q2. Currently, its merchants are in Asia negotiating the fall buys and JOSB will provide an update on the second half 2011 outlook for raw materials when Q3 is released at the end of November. Fabric costs typically make up 30-50% of the product costs which suggests at 40% that cotton would be about 13% of COGS, well below other firms in Sterne's universe. Raw materials are seen as a bigger factor than Chinese labor while China including Hong Kong represents less than 40% of its production. JOSB like other retailers will test price increases and indicates retailers will know soon whether these increases will stick. If not, JOSB will continue to offer “eye-popping” promotions to drive traffic, share and gross margin dollars. Its promotional high low pricing model provides the firm with greater flexibility to adjust prices versus those with an EDLP model. JOSB closed Wednesday at $43.38