BeaconLight Delivers Open Letter To The Board Of Jos. A. Bank
NEW YORK, Aug. 13, 2013
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
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
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
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
Shareholders Have Spoken Loudly that Hoarding of Cash for Acquisitions is the
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.
oImmediately 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.
oThe 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.
oThe 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.
oThe 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.
BeaconLight Capital LLC
SOURCE BeaconLight Capital LLC
Contact: Ed Bosek, BeaconLight Capital LLC, Tel 212.612.3130
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