cash

Jos. A. Bank's cash hoard trips up Men's Wearhouse

February 27, 2014: 2:46 PM ET

The retailer is sitting on a hefty pile of cash. That's probably why it's an acquisition target. But it has also spooked analysts.

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FORTUNE -- Back when it was still proudly called the schmatta trade, you would have expected retailers to be run as cash-focused operations.

But despite being a publicly traded company that prefers to be known as a menswear giant, Jos. A. Bank seems to have carried that accounting tradition into the present, minting money along the way.

Jos. A. Bank's windfall is no secret to those who have followed the retailer for a while. But its recent acquisition battle with rival Men's Wearhouse (MW) has shined new light on the fact that in the past few years Bank (JOSB) has seen its bank account swell. This is probably why it has become a target.

It's not exactly as notable as Apple (AAPL) -- the poster child for corporate cash generators. But for its size, it's pretty impressive. Bank had just over a million dollars in cash in early 2005. Two weeks ago, Bank disclosed that its cash pile, as of Feb. 1, had grown to $445 million, up 6,200% in nine years. (It has yet to release its full financial statements.)

chart-jos-a-bank

It rivals Apple on at least one measure. Last year, Bank generated $68 million in cash on roughly $1 billion in sales, for a cash conversion rate of nearly 7%. That was about the same rate as the tech giant. By comparison, Men's Wearhouse brought in just 1.2%, or $30 million, in cash of the $2.5 billion in sales it had in fiscal 2013, the latest annual figures available.

Ironically, it's that large and growing cash hoard that has turned some analysts off from Jos. A. Bank. According to Bloomberg, none of the four analysts who follow Bank recommend its shares, and they haven't for more than a year, well before the takeover talks with Men's Wearhouse began. Richard Jaffe, analyst at brokerage firm Stifel, says Bank's cash hoard is a sign that its managers are not reinvesting money back into its business. Indeed, Bank's earnings flatlined a few years ago, and they are now shrinking. Three years ago, the company earned nearly $100 million. Analysts estimate the company booked about $67 million in profit last year. Men's Wearhouse earnings are expected to have dropped in 2013, but they have nearly doubled in the past three years.

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Executives at Jos. A. Bank have said in the past that they are hoarding cash to make an acquisition. But Jaffe says that, beyond offering that tidbit, executives weren't forthcoming about their plans for the cash, or anything else. Bank, for instance, doesn't allow analysts to ask questions on its quarterly earnings call, which is unusual. Jaffe says he finally dropped coverage of the company in the middle of last year. And when Bank initially announced its bid to acquire Men's Wearhouse back in October, the company planned to use very little of its own cash in the deal; just $50 million.

"It's nice to generate a lot of cash, but if that's all you are doing ... that's not a great thing," says Jaffe.

Now that Men's Wearhouse has turned the tables and is eager to acquire Bank, the latter company's cash hoard, which Jaffe contends is a result of mismanagement, has made Bank a much more expensive purchase. In mid-February, Bank, after rebuffing Men's Warehouse, announced that it instead was going to buy outdoor men's retailer Eddie Bauer. Bank plans to use $340 million to complete the deal, something it probably couldn't do without a lot of cash.

What's more, as part of the deal, Bank is also buying back a portion of its own stock, offering to pay $65 a share, which is actually $5 more than what the stock is currently trading at. That doesn't sound like a smart financial move. (If the stock doesn't trade up, Bank will have wasted $23 million.) But it's probably not something you could do if you don't have a lot of cash lying around.

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Men's Wearhouse contends that the Eddie Bauer deal, which others have criticized (Bauer's track record is not great), and the stock buyback are just a means to block its acquisition, and it has sued Bank for failing to negotiate in good faith. On Wednesday, a judge expedited Men's Wearhouse's lawsuit, saying the Eddie Bauer deal was likely a defensive maneuver.

You would think that these shenanigans would give Men's Wearhouse cause for concern. Not so. Earlier this week, Men's Wearhouse upped its bid for Bank to $63.50 a share from an earlier $57.50.

Apparently, cash money talks, even if it looks like it has no clue what it's trying to say.

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