Men’s Wearhouse (MW) didn’t liked the way it looked with Joseph A. Bank (JOSB), and rejected its smaller rival’s unsolicited $2.3 billion takeover offer. This wasn’t a tough call to make.
For one thing, Joseph A Bank’s $48-per-share offer “significantly undervalues” MW stock, according to Bill Sechrest, the lead director of Men’s Wearhouse. But more important, Joseph A. Bank needs Men’s Wearhouse more than Men’s Wearhouse needs Joseph A. Bank.
Joseph A. Bank is infamous for offering unbelievable deals, such as “buy one suit and get four free.” Investors have often wondered how the company can afford to be so generous given its three straight quarters of declines in earnings, revenue and margins. During the latest quarter, net income at Joseph A. Bank fell 39% to $23.2 million, or 51 cents per share. Sales plunged a depressing 10.7% to $232.5 million while same-store sales, a key metric of retail performance at stores open at least a year, fell 15.9%.
Joseph A Bank, though, faces an even bigger problem with its near-ubiquitous advertisements: They aren’t working. “Customers did not respond as well to some of our highly promotional marketing campaigns as they did in the prior year, causing the disappointing sales decline in the quarter,” the retailer admitted in its latest earnings press release.
Moreover, as Men’s Wearhouse notes, the deal makes little sense. The company noted in a press release that it has more than double the sales of Joseph A. Bank, its next largest competitor. Men’s Wearhouse has also reported 13 straight quarters of positive same-store sales growth and expanded gross margins by 250 straight basis points over the same time period. Joining forces with Joseph A. Bank would hobble Men’s Wearhouse, not help it.
Not everything is honky-dory at Men’s Wearhouse, whose shares have slumped 12% in the second quarter on what it described as “difficult market conditions.” The company omitted any mention of the drama caused by the ouster of founder/pitchman George Zimmer earlier this year, which I argued in June was long overdue. It may be one of the reasons the stock had languished, before today. Zimmer doesn’t own enough shares of MW to buy the company without a partner.
Zimmer’s departure focused attention on the chain’s underperforming K&G chain, which the TV pitchman wanted to keep and management wants to sell. Logic seemed to be on management’s side. As I noted in June, K&G reported declines in same-store sales in every year but one between 2008 and 2012. The company is still looking at a “potential sale” of K&G.
Not surprisingly, Men’s Wearhouse calls the Joseph A. Bank offer “an opportunistic attempt to exploit a temporary dislocation in the stock price of Men’s Wearhouse in order to deprive Men’s Wearhouse’s shareholders of the intrinsic value of their investment.” It’s also below the $50 analysts from JPMorgan and shareholder Sentinel Investment had estimated the company could fetch.
Men’s Wearhouse management appears to be sound. In fact, the one area where investors could fault Men’s Wearhouse is how well it treated Zimmer. His total compensation for 2012 was $1.99 million, almost equal to the $2.09 million earned by his handpicked successor, Douglas Ewert. Zimmer’s base salary was $1.02 million, much higher than the $616,635 Ewert earned. Zimmer also got loads of perks, including private use of the company’s aircraft.
Zimmer — still a big holder of MW stock — stands to make out big in the event of sale, earning $2.69 million.
If the Joseph A Bank deal doesn’t occur, Men’s Wearhouse may attract other bidders given the value of its brand. The one open question is what Zimmer may do. Investors should be rooting for the company’s current management to succeed.
At the time of publication, Berr had no positions in the securities mentioned.
–Follow Jonathan Berr on Twitter@jdberr and at Berr’s World.