NEW YORK, Aug. 13, 2013 /PRNewswire/ -- BeaconLight Capital
LLC and its affiliates (together, "BeaconLight"), a significant
shareholder of Jos. A. Bank Clothiers, Inc. (NASDAQ: JOSB) ("Jos.
A. Bank" or the "Company") delivered today a letter to the Board of
Directors of Jos. A. Bank.
The full text of the letter follows:
August 13, 2013
Board of Directors
Jos. A. Bank Clothiers, Inc.
500 Hanover Pike
Hampstead, MD 21074-2095
Dear Board of Directors,
We are writing to you on behalf of BeaconLight Capital LLC and
its affiliates (together, "BeaconLight" or "we"), collectively the
beneficial owners of more than 1% of the common stock of Jos. A.
Bank Clothiers, Inc. ("Jos. A. Bank" or the "Company"), having been
shareholders for three years. After extensive study and analysis,
we are convinced that tremendous value is trapped inside the
Company due to the absence of a credible capital allocation policy,
an insular insider Board of Directors (the "Board"), poorly aligned
management incentives, and the Company's refusal to communicate
with shareholders. After several unsuccessful attempts to privately
engage in constructive dialogue with the Company and the Board, we
believe it is necessary to publicly voice our concerns about the
Company's direction. We urge the Board to meet with shareholders
with the goal of reconstituting the Board to add true shareholder
representation, and strongly encourage other shareholders to reach
out to the Company to demand change. With the simple changes
outlined in this letter, we believe that the stock should be worth
$70 per share even at a discounted
multiple to its peers.
Jos. A. Bank Has Underperformed Its Peers and Is the Cheapest
US-Listed Retailer
While we appreciate the role that current leadership played in
building the Company from a sleepy 100-store regional retailer to a
national 600-store company with over $1
billion in sales, they have delivered increasingly dismal
total shareholder returns over the last five years. The Company's
stock has underperformed the S&P Retail Index by 5%, 116%, and
40%, in the last five, three and one year periods,
respectively.
Although the Company has suffered weak operating results in the
past eighteen months, the vast majority of the stock's
underperformance is attributable to multiple contraction. The
market is heavily penalizing the Company for its inefficient use of
cash and exceptionally poor corporate governance. As a result the
Company currently trades at depressed multiples on depressed
earnings. In fact, at 6x enterprise value to consensus EBIT
expectations for the year ending January
2014, the company trades at nearly a 30% discount to its
peer group. Additionally, 6x EBIT is the lowest multiple of any
retailer publicly listed in the United
States with a market capitalization over $250 million.
The Board's Actions Make Clear Its Total Disregard for
Shareholders
The Jos. A. Bank Board has no
truly independent directors, has one of the longest average board
member tenures of any US-listed company, and has a combined
ownership of only 1.5% of the Company's outstanding stock. These
factors have resulted in a Board that defers to the Chairman,
Robert Wildrick, and seems to ignore
other stakeholders. While we acknowledge Mr. Wildrick's
contributions to the growth of the Company during his time as CEO,
his past success does not entitle him to run the Company as a
personal fiefdom.
Though the Board technically has four independent
directors, the reality is that every member of the Board has
relationships or connections to the Company or Mr. Wildrick. The
Lead Independent Director, Andrew
Giordano, was the former Chairman of the Board who hired Mr.
Wildrick to run the Company in 1999. Neal
Black, the Company's current CEO, was hired by Mr. Wildrick
after previously working with him at Belk. James Ferstl also worked with Mr. Wildrick at
Belk and at their ill-fated attempt to turn around Venture stores
in the 1990s. The remaining two directors, Sidney Ritman and William Herron, are both friends of Mr. Wildrick
and Mr. Giordano from Palm Beach.
This cohort allows the Chairman to collect $825,000 per year for consulting the Company on
acquisitions that none of the shareholders seem to want. Notably,
the entire Board combined only owns a measly 1.5% of the Company's
stock. In fact, in 2006 when he was the CEO, Mr. Wildrick sold
nearly his entire 5% stake in Jos. A. Bank at an average share
price of $28 and has not purchased
another share since.
In 2010, the Board installed a "share compensation" plan for
management, providing a cash and stock bonus based exclusively on
the annual performance of the Company's net income relative to
targets set by the Board. There is no compensation based on any
shareholder-aligned metrics, such as earnings per share, return on
capital, or total shareholder return. Further, each year, the stock
portion of the bonus is for a fixed amount of dollars rather than a
fixed number of shares. This actually creates a perverse incentive
for management to minimize the share price and thereby, accumulate
a larger stake in the Company over time.
The current composition of the Board opens the door for
shareholder abuse, and unfortunately, every recent governance
action by the Jos. A. Bank Board has
only served to tighten the Board's grip on the Company at the
expense of the shareholders. The Company continues to have a poison
pill and a staggered board even though less than 25% of public
companies have a staggered board and less than 10% have a poison
pill.
In addition, while most public companies have taken steps to
become more shareholder-friendly, Jos. A. Bank has become
increasingly unfriendly towards its owners. In August of 2012, the
Board increased the ownership threshold required to call a special
meeting from 35% to 50% of all shareholders. Typically, only 10% of
shareholders are required to call a meeting, and proxy advisory
firms are generally critical of a threshold above 15%. More
recently, in July of 2013, the Board once again amended the Bylaws,
this time to make Delaware the
exclusive venue for shareholder actions against the Company's Board
of Directors.
Limited and Misleading Communication with
Shareholders
Shockingly, in the summer of 2012, the Company decided that it
would only communicate via "public disclosures to ensure that all
Shareholders have equal access to the information." This was a
stark change as the Company's CFO had previously held routine
investor calls and communicated with sell-side analysts. Further,
the Company does not follow the protocol of hosting live public
conference calls with investors and analysts, and instead reads a
script and only answers prepared and curated questions.
This policy of no shareholder or analyst contact is misguided in
any environment, but is particularly egregious for a business that
has faced the most tumultuous period in its history and has seen
gross margins plummet over 600 basis points. Rather than help
shareholders understand the issues, the Company provided grossly
inadequate discussions of its results in the 10-Qs filed with the
SEC. Originally, the filings made it appear that most of the margin
pressure was due to pricing and competition, with cost inflation of
cotton and wool playing only a minor role. It was only after the
SEC initiated a correspondence asking for more detail on the gross
margin fluctuations during the year that the Company explained that
"substantially all of the decline for the first nine months were
due to these higher sourcing costs." This practice of disseminating
minimal and ambiguous disclosures has undoubtedly caused the stock
to underperform by increasing uncertainty and making it extremely
difficult for potential new investors to understand the
business.
Shareholders Have Spoken Loudly that Hoarding of Cash for
Acquisitions is the Last Straw
In addition to poor operational performance and inadequate
communications with investors, the Company's hoarding of cash
stands as the last straw for most investors. The Company has never
paid a dividend or re-purchased any shares. As a result, the
Company has a growing cash pile that reached a staggering
$377 million at the end of the fiscal
year ended January 2013. This equates
to $13.50 per share or 32% of the
Company's market capitalization. Remarkably, the Company's cash
reserve is more than double the value of its property, plant and
equipment, more than its total inventory, and even more than 1.5x
the Company's total liabilities. We see no conceivable business
justification for holding this much cash. By year end the cash pile
could approach $16 per share or
nearly 40% of the Company's market capitalization, all while Mr.
Wildrick is being paid a substantial sum to supposedly search for
acquisitions that shareholders do not want or agree with.
All of these actions reflect an insular Board focused on
maintaining the status quo, combined with the audacious belief that
shareholders will sit idly as they embark on a path of value
destruction.
Fortunately, at the shareholder meeting in June, shareholders
sent a clear message to the Board that the current path is
unsustainable. Over 31% of shareholders voted against incumbent
directors James Ferstl and
Sidney Ritman despite their running
unopposed. Additionally, for the first time in the Company's
history, the Say on Pay proposal was voted down. It is obvious from
these results that shareholders are losing their patience and that
the Board's grip on the Company is becoming tenuous.
The Way to Unlock Substantial Value
While the above-mentioned issues are concerning, we believe that
Jos. A. Bank has a solid long-term foundation, a talented
operational management team, and exciting growth prospects. With
the right capital allocation, strong corporate governance, better
aligned management incentives, and more appropriate investor
communication, we believe that the Company and its shareholders
will thrive in the years to come.
First, while the business has performed poorly recently, we
believe that these issues are largely temporary. Most of the
problems stem from the fact that the Company's raw material
purchases take longer to feed through for the Company than its
competitors. The timing difference is generally minor, but from
2010 to 2011, cotton and wool experienced a 10-sigma price move.
The price of cotton, specifically, nearly quadrupled in 18 months
before falling by over two-thirds in the following six months. As
costs were spiking for its competitors, Jos. A. Bank took advantage
of their lower input costs and promoted aggressively. This produced
banner years in fiscal years 2010 and 2011, growing revenue over
27% combined. In 2012, as competitors' costs were normalizing, the
Company faced rising input costs at a time when unfavorable weather
conditions also left it long in inventory. The Company tried to
become even more promotional to clear its inventory at the expense
of margins, but struggled. Ultimately, it decided to reset its
promotions at the end of 2012 and early this year. Most observers
have noticed that the Company's television advertising has been
considerably less frequent and sensational.
The change in promotional intensity, combined with much lower
and less volatile cotton and wool costs, is great for the future of
Jos. A. Bank's business. Though sales growth has suffered from the
reduction in promotions and likely will continue to suffer through
the rest of the year, there will be a solid base from which to grow
once the business laps the changes, and gross margins should
benefit from the powerful dual tailwinds of less promotions and
lower raw material costs. The few analysts who cover the stock
expect earnings per share of close to $2.75, but we see no reason why margins do not
return to historical averages in the low-60% range, which would
yield normalized earnings closer to $4 per share. At today's share price near
$40, excluding the cash pile, the
Company trades at approximately 6x normalized earnings. This is
simply too low for a retailer with real growth from box increases,
a new factory store concept, and optionality around tuxedo rentals.
Longer term, at maturity, we believe that Jos. A. Bank should be
able to earn $175 million in free
cash flow, or a 25% yield on the current enterprise value.
Unfortunately, the Company has chosen not to explain any of this
to the investment community, and instead is focused on finding
acquisitions for "long-term growth." The best investment that the
Company can make today for its long-term shareholders is to
repurchase shares at today's stock price, which is incredibly
depressed as a result of a ballooning corporate governance discount
in an information vacuum. Repurchasing shares with all of the cash
on the balance sheet should increase normalized earnings close to
$6 per share.
In our view, the paths to restoring the Board's relationship
with shareholders as well as the market's confidence in the Company
are straightforward.
- Immediately take action to de-stagger the Board and add a
significant number of truly independent directors who have no prior
connections to the current Board members or management.
- The Company should immediately return all of its cash to
shareholders, preferably through buy-backs, as long as the stock
continues to suffer from its severe discount. Further, the Company
should outline a policy for returning all future cash flows to
investors.
- The Board should rework its compensation practices to align
management incentives more closely with the creation of long-term
shareholder value. While business has struggled for the past 18
months, the executive team has done an admirable job operating the
business over the long term. We believe that most shareholders
would gladly reward the CEO, Neal
Black, and other executives with cash and stock bonuses
worth substantially more than current levels if they succeed in
creating real value.
- The Company should terminate Mr. Wildrick's consulting
arrangement and use the cash savings to build a legitimate investor
relations department. The Company's current communication strategy
is designed to impede, rather than encourage, investors from
becoming shareholders. The Company also has no corporate
presentation, does not attend investor conferences, does not
communicate with sell-side analysts, and will not interact with
current or prospective investors. As a result, prospective
investors are at an information disadvantage compared to
shareholders who completed their initial diligence prior to the
Board's change in communication policy. This severely limits the
pool of possible investors and negatively impacts the stock price.
A professional investor relations team would quickly correct this
problem and help to restore transparency to the business.
We strongly believe that with these actions, the Company's stock
could be worth more than $70 per
share today, which better reflects the solid business that has been
built over the last two decades.
We remind you that as directors, you owe a fiduciary duty to the
shareholders, the true owners of the Company. Your recent actions
and general approach towards shareholders indicate that you have
been neglecting your duties as a Board. We urge you to immediately
act to restore shareholder confidence by following the suggestions
outlined in this letter. Otherwise, we believe it is likely that
shareholders will hold the Board accountable and seek change by
replacing the Chairman at the 2014 annual meeting. Once again, we
encourage our fellow shareholders to voice their displeasure with
the Board and let it be known that change is needed
immediately.
Sincerely,
/s/
Ed Bosek
BeaconLight Capital LLC
SOURCE BeaconLight Capital LLC