The End of an Era for This Retailer
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George Zimmer, the founder and face of Men's Wearhouse (NYSE: MW), was abruptly fired as the company's Chairman after butting heads with the CEO. Disagreements regarding the sale of K&G, the company's discount brand, as well as executive compensation, led the board to conclude that Zimmer was undermining the authority of the CEO. Zimmer, owning just a 3.5% stake in the company, doesn't have enough voting power to pressure the company into letting him return. A leveraged buyout of the firm is possible, although Zimmer would likely demand control of the company. Without Zimmer it's unclear whether Men's Wearhouse will retain the qualities that make it a great American company.
What makes Men's Wearhouse so special
Men's Wearhouse focuses on one thing and one thing only: men's formal wear. Unlike department stores and other retail outlets, which cater to a wide variety of customers, Men's Wearhouse aims to provide the best experience possible for men looking to buy a suit or rent a tuxedo. Customer service is key.
I recently needed to buy a suit for a wedding, and Men's Wearhouse was the first and only place I considered. The moment I walked into the store I was greeted by an employee who proceeded to show me a variety of different suits. I told him my price range and the occasion and he found the perfect suit for me. I was quickly measured, picked out a couple of shirts, and within 20 minutes I was done. Two weeks later I picked up my tailored suit, which fit perfectly, and I was on my way.
This level of customer service is what makes Men's Wearhouse stand out. The employees are knowledgeable and do everything they can to find you the perfect suit. The whole process is fast and easy. The focus on the customer is what has led to Men's Wearhouse becoming the dominate destination for men's formal wear.
A Zimmer-less company
One sticking point between Zimmer and the board of directors was the rising compensation of top executives. Current CEO Doug Ewert had his salary more than double to $1.25 million for the current year, along with up to $1.25 million in bonuses and other incentives. Zimmer opposed increasing the compensation, so it's no surprise that the board wanted him gone.
Men's Wearhouse needs to maintain its intense focus on customer satisfaction in order to remain competitive. You can buy a cheaper suit almost anywhere, but the level of service offered by Men's Wearhouse is the main draw. I'd gladly pay a little more for a suit in order to avoid having to sift through racks of options and deal with employees with little or no knowledge of a proper fit.
I wrote about Men's Wearhouse in January in an article entitled Suit Up With This Stock, concluding that the stock was a bargain at around $32 per share. Since then the stock has risen by nearly 16%, and although the stock still looks reasonably priced I am concerned about the future of the company.
My fear is that Men's Wearhouse will attempt some sort of revamping that takes the focus off of customer satisfaction. If growth becomes the new focus then the customer experience will likely suffer. Zimmer's relentless focus on the customer is what made Men's Wearhouse great, and without the founder involved the future of the company has become murky. Hopefully management won't change that.
While the namesake Men's Wearhouse stores sell mid- to high-end suits, the K&G stores focus on the low end as well as more casual clothing. While Zimmer opposes the sale of K&G, on this point I tend to agree with management. K&G is somewhat outside of the company's core competency and has no discernible advantages over other low-priced retailers. Margins on low-end items are not as high as the items sold at the namesake stores, and K&G doesn't have anywhere close to the brand awareness Men's Wearhouse maintains.
K&G competes with companies like Kohl's (NYSE: KSS) and J.C. Penney (NYSE: JCP), both of which focus on low prices. The problem with K&G is that, prior to discovering it upon researching Men's Wearhouse in January, I had never heard of the stores before. It turns out that I live 15 minutes away from a K&G store. While everyone knows about Kohl's and J.C. Penney, there seems to be very little awareness about K&G.
K&G only has around 100 locations, compared to Kohl's and JC Penney's 1,100 each. Kohl's is arguably the leader in the realm of value department stores, with nearly $20 billion in annual sales and convenient locations. J.C. Penney has struggled in recent years with a failed turnaround effort and mounting losses, but its $13 billion in annual sales still make it a go-to destination for many value-conscious shoppers. K&G is too small and too generic to compete against the the big boys. Buying the company in the first place was likely a mistake, and selling it is probably the best option.
The bottom line
The departure of George Zimmer from Men's Wearhouse is a bit concerning. I like the company, and I think that the stock is reasonably priced, but the path the company takes from here is unclear. Selling K&G is a good move, removing a low-margin drag on the company, but the loss of Zimmer's iconic image could lead to customers jumping ship. If Men's Wearhouse sticks to its focus on the customer then the company should be fine. Otherwise, there could be trouble ahead for Men's Wearhouse.
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