Shares of Jos. A. Bank Clothiers Inc. fell 1 percent Wednesday after jumping 12.5 percent the day before on news that its activist investor, BeaconLight Capital, is agitating for change.
BeaconLight, which holds a 1 percent stake in the company and has been a shareholder for three years, thinks the stock should be trading much higher.
The stock price, on a generally down day on Wall Street, could also be a forebearer of financial pressures ahead for the men’s wear retailer.
That’s not unlike the situation faced by J.C. Penney Co. Inc., whose own activist investor, William Ackman of Pershing Square Capital Management, has been causing major headaches, lobbying this week for its chief executive officer, Myron “Mike” Ullman 3rd, and board chairman Thomas Engibous to be replaced. Even after Ackman resigned from the Penney’s board on Tuesday, the retailer’s stock fell 3.7 percent because even though he’s no longer in the board room, the challenges for the retailer remain.
Neal Black, Jos. A. Bank’s chief executive officer, did not respond to a request for comment. Neither the company nor its board has yet issued a response to the open letter sent by BeaconLight on Tuesday.
Jos. A. Bank in June said it is working with investment banking firm Financo LLC to evaluate possible acquisitions as the company looks at its strategic options to fuel growth.
Jos. A. Bank’s stock closed at $44.89 Tuesday. Wall Street’s average estimate for second-quarter earnings per share is 68 cents, compared with the year-ago EPS of 83 cents. In BeaconLight’s letter, Ed Bosek wrote, “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, 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.”
BeaconLight said it believes the stock should be “worth $70 a share, even at a discounted multiple to its peers.”
Bosek also noted that while current leadership has a role in building the company from a 100-store regional retailer to a 600-unit national one, “they have delivered increasingly dismal total shareholder returns over the last five years.”
In addition to seeking independent directors, Bosek said the company should “immediately return all of its cash to shareholders, preferably through buybacks as long as the stock continues to suffer from its severe discount.”
James Schaye, ceo of Eaton Hudson, an asset disposition adviser to retailers, said, “Boards need to challenge management, not agree with the slick presentations by the management team.”
While it isn’t often clear when boards do or don’t make those challenges, it’s when they don’t that having a push in the right direction from an activist investor can be a good thing.
“I believe that in most cases, an activist investor is extremely astute at identifying undervalued situations in retail,” said Antony Karabus, president of Hilco Retail Consulting. “As a result, their presence can be very beneficial for shareholders, as was seen in situations like The Jones Group and Dillard’s. However, as we have seen in some high-profile recent situations, it can backfire when too-radical prescriptions for change are forced upon a retailer. The key for success is to both identify the undervalued situation and ensure the prescription imposed by the activist is right and appropriate for the applicable retailer’s existing customer and does not turn off those customers before profitable new customers are added.”
The Jones Group Inc. in June saw activist investor James Mitarotonda, chairman and ceo of Barington Capital Group, join its board. Mitarotonda has a history of pushing Warnaco Group Inc., Dillard’s Inc., Nautica, Harry Winston and others to tighten up operations. It’s now pushing for Jones to sell off some smaller brands and focus on its core strengths.
Ratings agency Standard & Poor’s last month issued a report about the impact of activism on corporate management and governance. Laurence Hazell, a governance specialist in the S&P Corporate Ratings group, said that how management and the board respond to the activist proposals can provide good insight “about their qualities as leaders of the corporation,” such as their willingness to listen to and consider alternative perspectives and their “ability to adopt a new direction or convincingly articulate why their own current plans are the right ones.”