Is Men’s Wearhouse the Next J.C. Penney?

Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Men’s Wearhouse (NYSE: MW) suddenly fired Founder and Executive Chairman George Zimmer yesterday.

This might sound like a normal event on Wall Street, but this firing had some unique circumstances.

What unique circumstances? 

Not only did the firing take place on the same day of the annual shareholder meeting, but that meeting was canceled due to the firing. Could the timing have been any worse?

Furthermore, Men’s Wearhouse didn’t allow George Zimmer to issue a statement that would have prevented embarrassment. For example, Men’s Wearhouse upper management could have allowed George Zimmer to state that he was leaving to spend more time with his family. 

Will fundamentals win out in the end?

Men’s Wearhouse has consistently improved its revenue and earnings over the past three years. In the first quarter, revenue improved 5.10% year over year, and earnings improved 23%.

But has Men’s Wearhouse performed well compared to peers Jos. A Bank (NASDAQ: JOSB) and Kohl’s (NYSE: KSS) over the past several years? 

MW data by YCharts

Men’s Wearhouse and Jos. A Bank have delivered similar performances. However, Men’s Wearhouse has been the better investment because it pays a dividend. Men’s Wearhouse currently yields 2.00%. Since Men’s Wearhouse has $155.10 million in cash and no debt, the dividend appears to be safe.

The short interest on these companies are high: 

  • Men's Wearhouse 5.30%
  • Jos. A Bank 29.90%
  • Kohl's 9.20%

When the consumer is weakening, it's only a matter of time before the retail sector gets hit. This is likely the biggest reason for the high short positions. Sometimes shorts attack a company with unmanageable debt loads, but debt management is good for all three companies. 

Men's Wearhouse might have the smallest short position, but after today's events, it might become the riskiest of the three companies mentioned above. Kohl's is likely to be the safest investment going forward thanks to its product diversification. Men's Wearhouse and Jos. A Bank are focused solely on menswear.  

Customer backlash

Numbers are important, but sometimes other factors play a bigger role.

For instance, Men’s Wearhouse customers are looking at yesterday's firing as a tasteless and despicable move. If you read any article covering the story, look at the comments on the bottom of the page. Customers don’t like the way the firing was handled, and the vast majority of them state that they will never shop at Men’s Wearhouse again. The most infuriating detail: George Zimmer was fired by the man he hired as CEO two years earlier.

Apparently, one of the reasons for the firing was because George Zimmer felt the company was heading in the wrong direction. If rumors are correct, then this partially related to the company’s target market. Current CEO Doug Ewert wants to target a younger audience. While this might seem like a logical move, risks exist. If Men’s Wearhouse loses its current market, it will be difficult to recapture that market. Also keep in mind that this approach failed for former J.C. Penney CEO Ron Johnson. 

Another interesting aspect of this story is that the public doesn’t know for sure what actually happened yesterday. Considering someone had to know the reason for George Zimmer’s firing, this was unfair to the retail investor. As several media commentators stated, the stock should have been halted until more information was revealed. Below is a chart for Men's Wearhouse on the day the news broke, June 19, 2013:

MW data by YCharts

The above chart might seem confusing because it looks like the stock appreciated for the day, but the previous close was $37.47.

It's interesting that the stock only dropped 1.15% on a day when the S&P 500 plummeted 1.39%. That’s actually pretty good. Bargain buyers came in and drove the stock price up from its early morning lows, but was this a wise move?

Conclusion

Men’s Wearhouse had been performing well for several years. Management probably didn’t realize how much negative attention this story would receive. Now Men's Wearhouse has put itself in a precarious situation. The fundamentals might look good, but those fundamentals could suffer now that the company is receiving negative publicity. Losing George Zimmer as the face of the company will also hurt. Zimmer’s catchy slogan, “You’re going to like the way you look, I guarantee it," held power and attracted people to the store.  

Despite bargain buyers moving in, downside risks outweigh upside potential. 


Dan Moskowitz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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