Men’s Wearhouse: Suited for Growth

“You’re gonna like the way you look. I guarantee it.” You’ve probably seen the TV commercials for Men’s Wearhouse (NYSE: MW) featuring gravelly voiced George Zimmer, the founder of the clothing retailer. But the company sacked Zimmer three months ago, which set off concerns about the company’s future and a brief but sharp dip in the stock’s price. We think it remains a solid company with a bright future.

The company announced June 18 that it had fired Zimmer, and postponed a shareholders meeting that had been scheduled for the same day. The announcement took the industry by surprise.

Financially, Men’s Wearhouse had been performing quite well at the time of Zimmer’s ouster, with sales increasing 5.1 percent in the quarter ended May 4 to $616.5 million. Sales for 2012 were $2.5 billion, up 4.4 percent year over year, with earnings per share (EPS) rising to $2.55 from $2.30.

The stock dropped sharply right after the abrupt announcement of Zimmer’s departure, as rumors swirled that the company might be in real trouble. After it became clear that it wasn’t, the stock rebounded, although it is still trading somewhat below its 52-week high. The price-to-earnings (P/E) ratio is around 14.

So why was Zimmer sent packing? Many analysts believe that the company’s board of directors wants to make a stronger pitch to younger customers (the elusive “Millennials”) who generally don’t like to wear suits, and that the gray-bearded Zimmer was not necessarily the best public face for that strategy.

A few weeks after Zimmer left, the company’s board offered further comments: “Mr. Zimmer had difficulty accepting the fact that Men’s Wearhouse is a public company with an independent board of directors and that he has not been the chief executive officer for two years. He advocated for significant changes that would enable him to regain control, but ultimately he was unable to convince any of the board members or senior executives that his positions were in the best interests of employees, shareholders or the company’s future.”

Reportedly, Zimmer had reversed his long-standing position against taking the company private by arguing for a sale of the Men’s Wearhouse to an investment group. The board of directors opposed this, stating that “such a transaction would not be in the best interests of our shareholders, and it would be a very risky path on many levels. It would require the company to take on a huge amount of debt to pay for such a transaction.”

The board unanimously decided that now is not the time to sell the company, instead sticking with a strategic plan developed by CEO Doug Ewert and the rest of the company’s management team. “We all believe this will maximize long-term value for all shareholders,” the board said.

Zimmer built the company from one store in 1973 into the nation’s largest men’s boutique clothing retailer. Today, it has more than 1,100 stores nationally, under both the Men’s Wearhouse brand and also Moore’s and K&G. The stores carry a wide  selection of suits, sport coats, furnishings and accessories in exclusive and non-exclusive merchandise brands.

Most K&G stores carry a full selection of women’s apparel. Tuxedo rentals are available in the Men’s Wearhouse, Moore’s and Men’s Wearhouse and Tux stores. Additionally, Men’s Wearhouse operates a global corporate apparel and workwear group consisting of Twin Hill in the United States and Dimensions, Alexandra and Yaffy in the United Kingdom.

The recession hit the men’s apparel industry hard. Unemployed men generally aren’t in the market for new suits (as long as they have one to wear to job interviews), and millions of Americans found themselves with part-time work that may not necessarily require business attire. But as the economy has rebounded, revenues for clothing retailers—particularly the kind of clothing Men’s Wearhouse sells—have ticked upward.

The company has been making an effort to expand into new markets. It recently completed its acquisition of JA Apparel (“Joseph Abboud”), a well-known clothing brand.

Ewert said, “We’re delighted to have closed on this acquisition promptly and have reunited Joseph Abboud with his iconic brand at Men’s Wearhouse. This accelerates our strategy of offering exclusive brands with broad appeal at attractive prices. Current and future customers will benefit from authentic American designer clothing, manufactured in the United States, at unparalleled value.”

Under the terms of the merger, Men’s Wearhouse acquired JA Holding, Inc., the parent company of Joseph Abboud, in a cash transaction for approximately $97.5 million in cash, subject to certain adjustments, and JA Holding, Inc. will continue to operate as a wholly owned subsidiary of Men’s Wearhouse.

The company also made an agreement with JPMorgan Chase (NYSE: JPM) to repurchase $100 million of the company’s common shares under an accelerated share repurchase program. Ewert told investors that this action “demonstrates our commitment to delivering increased value to shareholders while continuing to invest in the important opportunities that will drive our long-term growth.”

He added: “We believe that the combination of this accelerated share repurchase, the reuniting of Joseph Abboud with his iconic brand, and our ongoing process evaluating alternatives for K&G, are significant 2013 strategic actions that better position us for growth and will unlock significant value for shareholders.”

The retailer will be reporting its second quarter results after the market closes tomorrow (September 11). This will be the first earnings report since Zimmer was terminated. If the report exceeds the rather pessimistic projections that have been issued by analysts, as we think it will, the stock could be poised for another climb.

Thomas Scarlett is an investment analyst at Personal Finance and its parent website, Investing Daily.