George Zimmer, the founder of Men’s Wearhouse Inc., apparently didn’t like the way the company looked; it was a dispute about the company’s strategic direction that led to his sacking, the company said Tuesday.
That clarity, days after Mr. Zimmer’s sudden firing last week, reassured investors. They drove up the price of Men’s Wearhouse shares, pushing the stock close to a 52-week high.
Their enthusiasm may be premature. The departure of Mr. Zimmer – famous for his “you’re going to like the way you look – I guarantee it” tagline in TV commercials – leaves lots of questions. And it raises another issue: Is the best buy for investors in the men’s-wear space now the company’s chief competitor, Jos.A. Bank Clothiers Inc.?
First, Men’s Wearhouse. The Texas-based company, owner of 1,100 stores including the 120-location Moores Clothing in Canada, has rebounded from the recession, even as unemployment in the U.S. and Canada has softened demand for work wear.
Earnings per share increased at double-digit rates in each of the last two years, as Men’s Wearhouse successfully navigated a style shift in suits toward slimmer, more European fits, says analyst Richard Jaffe of Stifel, Nicolaus & Co. Inc., who has a “buy” rating on the stock.
The company’s primary nameplate, Men’s Wearhouse, plans to add 30 stores to its roughly 650 this year, says Mr. Jaffe, who has a $38 (U.S.) target price on the stock. In addition, the company is introducing outlet stores, an efficient way to profitably sell its closeout merchandise. (However, the Moores stores in Canada are a sore spot: Same-store sales, namely sales from locations open at least one full year, were down 7 per cent in the first quarter.)
Given all this, the price for the stock is not unreasonable. With Tuesday’s gains, the shares trade at just over 13 times forward earnings, according to Standard & Poor’s Capital IQ. They offer a dividend yielding 2 per cent.
The danger? While Wall Street accepted the explanation for Mr. Zimmer’s firing, it remains unclear whether customers will. Message boards filled over the last week with denunciations of the company and vows to never shop there again.
In addition, Men’s Wearhouse said one of the key issues in Mr. Zimmer’s departure was that he was “arguing for a sale of the Men’s Wearhouse to an investment group,” while the company’s board “is unanimously of the view that now is not the time to sell the company.” While the share price may have increased Tuesday on hopes Mr. Zimmer will launch a takeover bid for the company, it can be a long, hard road to a deal if the board is unwilling, and can point to its successes.
Jos. A. Bank has not performed nearly as well as Men’s Wearhouse; the Maryland-based chain has been behind on the trend to slimmer suits. Its recent quarterly reports have offered sales disappointments and earnings misses. Investors rejected the company’s executive pay plan.
Why take another look at this loser? One reason is its mountain of cash; with more than $300-million at last quarter’s end, and no debt, roughly $11.50 of the company’s $41 share price comes from cash. Back that out, and the company’s forward price-to-earnings ratio is more like 10, not the nominal 14.5.
Management says, bluntly, “we know what’s happening to us” because of its past inventory mistakes and is correcting its pricing and products. The company says it’s mulling over putting its cash to use in acquisitions (so, no dividend is imminent); it also sees opportunities to grow from around 600 stores now to about 800, and is expanding its tuxedo-rental business.
Mark Montagna, an analyst at Avondale Partners LLC, is skeptical, saying management has no experience with acquisitions, and investors now have “zero chance” of benefiting from the cash that “had been propping up the shares in the face of the likely down year of [earnings per share] in 2013 and what may turn out to be another down year of EPS in 2014.”
So, to paraphrase Mr. Zimmer, when I suggest Jos. A Bank stock will turn around, I can’t guarantee it. But it might be worth the cost of a couple of suits to find out if Wall Street’s sentiment will turn. As far as Men’s Wearhouse goes, the sale on the company’s shares seems over.