Men’s Wearhouse Zings Zimmer

The company responded to his resignation by providing further details about the reasons for terminating Zimmer as executive chairman last week.

George Zimmer wanted to take his ball and go home.

This story first appeared in the June 26, 2013 issue of WWD.  Subscribe Today.

Two years after turning the reins as chief executive officer of The Men’s Wearhouse Inc. over to Doug Ewert, the founder of the $2.5 billion retail chain “advocated for significant changes that would enable him to regain control, but ultimately he was unable to convince any of the board members or senior executives that his positions were in the best interests of employees, shareholders or the company’s future,” the board of directors said Tuesday.

The statement, released the day after Zimmer resigned his seat on the board and less than a week after he was terminated as executive chairman, finally provided some clarity on the board’s decision, which appeared to come out of nowhere last Wednesday and prompted the cancelation of the annual shareholders meeting. The meeting has yet to be rescheduled.

On Tuesday, the board said Zimmer “had difficulty accepting the fact that Men’s Wearhouse is a public company with an independent board of directors and that he has not been the chief executive officer for two years.” When his repeated attempts to be the primary decision maker — attempts that included demands for “veto power over significant corporate decisions” — were not granted, Zimmer started talking to investment banking firms about buying the company.

“George said if the board wouldn’t listen to him, he’d sell the company,” a source with knowledge of the situation told WWD.

Zimmer, who owns 3.5 percent of the company’s stock, declined to be interviewed for this article.

Sources close to the company said the board never seriously considered selling the business, despite Zimmer’s attempts. “The company has a clean balance sheet and no debt,” said one source. “Why would they put themselves over $2 billion in debt?”

The only way the company could be wrested away from current management would be through a hostile takeover.

According to the board: “Mr. Zimmer reversed his long-standing position against taking the company private by arguing for a sale of the Men’s Wearhouse to an investment group. The board believes such a transaction would not be in the best interests of our shareholders, and it would be a very risky path on many levels. It would require the company to take on a huge amount of debt to pay for such a transaction. The board strongly believes that such a transaction would be highly risky for our employees and would threaten our company culture that is so important to all of us.

“The board is unanimously of the view that now is not the time to sell the company,” the statement continued. “The board is committed to a strategic plan carefully developed by ceo Doug Ewert and the rest of the company’s experienced management team, which we all believe will maximize long-term value for all shareholders.”

This statement is nearly identical to one issued to employees on Tuesday.

According to sources, management at Men’s Wearhouse, which is routinely ranked among Fortune magazine’s 100 Best Companies to Work For, was troubled about not being able to communicate with its employees about the reasons for Zimmer’s ouster.

That changed on Tuesday when more of the reasons came to light. The board said Zimmer, who had hand-picked Ewert as his successor in 2011, had reversed course, refusing to support Ewert and the other management team members “unless they acquiesced to his demands.” He also “expected veto power over significant corporate decisions,” including executive compensation. The board said an independent committee reviews compensation and sets policy as is customary for public companies.

In 2012, Ewert had a base salary of $617,000, cash bonuses totaling $400,000 and stock and option awards of $1 million, for a total compensation package worth $2.1 million. In 2011, he received $5.4 million in compensation, but $3.6 million of that figure was in stock awards that will not necessarily be realized.

In the first quarter ended May 4, profits at the company rose 23.1 percent to $33.1 million, or 65 cents a diluted share, from $26.9 million, or 52 cents, a year ago. Net sales rose 5.1 percent to $616.5 million from $586.6 million for the same period last year.

Zimmer also reversed his previous acceptance of the company’s decision to review strategic alternatives of its K&G Fashion Superstore division, the board said.

“After initially supporting the review of strategic alternatives for K&G as proposed by management and supported by the board, Mr. Zimmer reversed course. Despite Mr. Zimmer’s objection, the board and management remain committed to the K&G review process.”

In March, the company said it was evaluating strategic alternatives for its struggling K&G discount division. K&G represented 16 percent of company sales in the first quarter.

As a result of all these disagreements, “Mr. Zimmer presented the board with the choice of either, a) continuing to support our ceo and the management team on the successful path they had been taking, or b) effectively reinstating Mr. Zimmer as the sole decision maker,” the statement said. “The board strongly believed that the best course of action was to reaffirm its support for Doug Ewert, the senior management team, our shareholders and our employees.”

The board expressed regret about the “total breakdown of the relationship” with Zimmer, saying it had “made considerable efforts to find a solution that would have allowed him to continue to have a significant involvement with Men’s Wearhouse. Unfortunately, Mr. Zimmer wouldn’t accept anything other than full control of the company and the board was left with no choice but to terminate him as executive chairman.”

In a research note, analyst Richard Jaffe of Stifel Nicolaus said “Zimmer had ‘founder’s regret’ once he found himself no longer in the driver’s seat and not in alignment with the board’s decisions.”

Jaffe said he believes off-loading K&G “is a good thing and the buyout of Men’s Wearhouse, especially at the current valuation, would be a poor decision for the business and likely put the franchise at risk by burdening it with debt.” He added that the decision to continue on the path set by Ewert and the management team over the past two years “is a net positive for investors,” and he reiterated his buy rating on the stock.

On Tuesday, Men’s Wearhouse stock closed up 5.7 percent, or $2 a share, to $37.13.

The board’s statement didn’t address whether Zimmer would be retained as Men’s Wearhouse’s advertising spokesman or whether a possible change in marketing direction was a factor in his departure. Now that the former chairman is no longer an employee, the company would be obligated to pay him $250,000 a year for four years for continued service in this area.

Jaffe mentioned the chain’s marketing direction as a possible point of contention when the board removed Zimmer last Wednesday.

On the first-quarter earnings call earlier this month, the company mentioned it was positioning designer Joseph Abboud as a style expert on its Web site. According to Ewert, “During the first quarter, we launched our new Men’s Wearhouse e-commerce site and took a major step forward in providing our customers a compelling omnichannel shopping experience. The new site incorporates helpful content like expert advice from our chief creative director, Joseph Abboud, wardrobing suggestions with our LookMaker functionality, intuitive high-speed navigation and much more.”

The positioning of Abboud as a potential new face of the company was apparently another thorn in Zimmer’s side, sources said.

However, Men’s Wearhouse has been working hard over the past couple of years to enhance its positioning with the younger customer.

While Facebook and other social media outlets over the past week have been full of diatribes from customers, the majority of them critical of Zimmer’s removal, several market research organizations have noticed weakness in Men’s Wearhouse attempts to build its base of young consumers, considered critical not just for its ongoing apparel retail business but also for the tuxedo rental business that has become a crucial part of its sales, accounting for one-sixth of its $2.5 billion in 2012 revenues.

YouGov last week released data indicating that the percentage of consumers in the 18- to 34-year-old bracket, who would consider purchasing at Men’s Wearhouse, had fallen by more than half, from 25 percent in December to 11 percent this month, while purchase consideration among competitors dropped from 18 percent to 14 percent over that same span. The company maintained dominance among those ages 35 and up, with 17 percent considering purchasing there versus 15 percent for the rest of the sample. The findings are based on input from more than 1.5 million U.S. consumers.

Ted Marzilli, senior vice president and global managing director of YouGov BrandIndex, said the decline was “certainly not unprecedented, but in the context of its competitors, it is statistically significant.”

Market Force Information Inc. ran data for WWD in which the men’s wear chain fared well among respondents over 35 years old, but lagged among those in the 18-to-34 bracket.

Sixty-eight percent of the sample was in the younger demographic, with 61 percent describing Men’s Wearhouse as “a favorite.” Among those 35 to 49, Men’s Wearhouse was favored among 17 percent, higher than the group’s 14 percent representation, while 16 percent of the 50- to 64-year-olds called it a favorite, higher than that group’s 13 percent of the sample.

Those over 65 constituted 6 percent of the study, and Men’s Wearhouse garnered the same percentage as a favorite.

Online interest in Zimmer himself spiked following his ouster, nearly quadrupling in the single day following the board action, according to Kontera’s brand insights and discovery module. Content consumption directed at Zimmer increased 336.8 percent between June 19, the day of his exit as chairman, and June 20, while consumption tied to Men’s Wearhouse rose 20 percent. Kontera cautioned that consumption about Zimmer was zero as recently as June 17 and that interest in the brand he started historically has been “very low.”