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Men'sWeek issue 10/31/2013

It’s been a heck of an anniversary year for The Men’s Wearhouse.

This story first appeared in the October 31, 2013 issue of WWD. Subscribe Today.

With its long track record of success over the past 40 years as a backdrop, the $2.5 billion Fremont, Calif.-based men’s specialty store chain has faced some major challenges — as well as some significant triumphs — over the past several months.

The first, and arguably the most controversial, came on June 19 — the day of the company’s annual shareholders meeting — when it could have celebrated four decades of success but instead revealed that it had fired founder and executive chairman George Zimmer. The break with Zimmer, who also served as company spokesman and whose gravelly promise that “You’re going to like the way you look, I guarantee it” had become part of the nation’s lexicon, was startling and unexpected and led to the cancellation of the meeting.

Over the next few weeks, the two parties publicly traded barbs, leading Zimmer to resign from the company’s board and reveal that his termination had come as a result of his “growing concerns with recent board decisions and the strategic direction of the company I founded and successfully led for the past 40 years.” News subsequently surfaced that Zimmer, who owns 3.5 percent of the company’s stock, was plotting a takeover of the retailer and had been reaching out to any private equity firm that might be a potential partner in a leveraged buyout.

The company swatted that idea aside, retorting that since Zimmer willingly turned the chief executive officer reins over to Douglas Ewert two years ago, he continued to “advocate 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 additionally said at the time that 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.

The brouhaha died down shortly after, and all has been quite on the Zimmer front since the summer.

But the company itself continued to make headlines.

In July, Men’s Wearhouse signed a definitive agreement to acquire JA Holding Inc., owner of the Joseph Abboud name and trademark, for $97.5 million in cash. The bold move brings a strong proprietary label to the retailer along with its U.S. factory, allowing the company to mine the goodwill around providing a Made in the U.S.A. product. It also reunites the original designer with the label he created in 1987. Men’s Wearhouse hired Abboud as chief creative director at the end of 2012.

RELATED STORY: Catching Up With Joseph Abboud >>

The company put plans in motion to pull the label out of the wholesale market and mapped out a course to significantly expand its reach within Men’s Wearhouse’s 1,200-plus stores in the U.S. and Canada.

But just when it looked like things had quieted down again came the news that Men’s Wearhouse’s key competitor, Jos. A. Bank Clothiers, with funding from Golden Gate Capital, had made an overture to acquire the company for $48 a share in cash. Although Men’s Wearhouse received the proposal on Sept. 18, it didn’t reject the offer until Oct. 9, when Jos. A. Bank publicly disclosed it. The offer represents a 42 percent premium to the closing price of Men’s Wearhouse’s stock of $33.71 on Sept. 17, and a 17.8 percent premium to the 52-week high and five-year high of $40.75, according to an investor presentation from Goldman Sachs and Financo Inc. that was filed with the Securities and Exchange Commission. The company’s stock is now selling for around $44.

Ewert’s response when the news was made public was definitive. “Men’s Wearhouse has undertaken a number of strategic initiatives to accelerate growth and profitability, including our recent acquisition of JA Holding Inc. and the Joseph Abboud brand. We believe we are well positioned to deliver compelling value to our shareholders.” The company has since adopted a poison pill to discourage this or any other takeover attempts.

And he has not swayed from that position since then.

On Monday, the company released a 39-page investor update providing details on its plans “to deliver outsized growth” as an independent business. The retailer is projecting that by 2016, its initiatives could impact revenue by $450 million to $550 million, excluding certain items such as the divestiture of the K&G Fashion Superstore business. Those initiatives include contributions from the following: $130 million to $170 million in comparable-store sales, excluding Joseph Abboud; $90 million to $120 million from the Joseph Abboud business; $210 million to $230 million from the expansion of the store base, and another $20 million to $30 million from its MW Cleaners and corporate apparel businesses.

In an interview last week, Ewert was especially vocal in his opposition to a merger with Jos. A. Bank. “We think Men’s Wearhouse is a great company and has one of the best specialty store concepts out there,” he said. “We have a great team, a great brand, a great strategy and a great track record.” He pointed out that Men’s Wearhouse is twice the size of Bank, which he said “has no growth strategy,” and the Men’s Wearhouse nameplate has had 14 consecutive quarters of same-store sales growth.

“We have everything we need to keep delivering strong value to our shareholders, and we believe a price of $48 significantly undervalues the company.”

Jos. A. Bank itself has faced some severe criticism in recent months and said in June that it was actively pursuing acquisitions and had retained Financo LLC, an investment banking firm, to assist in the search. It had reportedly been among the bidders for Fifth & Pacific’s Lucky Brand division, which has yet to be sold. BeaconLight Capital, which holds a 1 percent stake in the company, began agitating for change this summer, citing Bank’s “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.” The Men’s Wearhouse offer came soon after.

All in all, it’s probably not the anniversary celebration Men’s Wearhouse would have chosen for its 40th year in business.

RELATED STORY: Men’s Wearhouse Spring 2014 >>

Ewert admitted that the falling out with Zimmer and the Jos. A. Bank proposal have been a distraction from the day-to-day running of the company. “Business is hard enough today without having to focus on things like this. But we’re fighting the fight and we believe we have a great strategy and can continue to deliver strong results.”

The linchpin of that strategy is the Joseph Abboud brand.

“It will elevate our whole level of style and quality,” Ewert said.

The company believes the Joseph Abboud brand can easily be a $300 million-plus business within two years and will use the label on all product categories in the store, from suits and tuxedos to sportswear and furnishings. Licensing and international expansion are also in the cards. The first taste of the product will be sprinkled into about 100 Men’s Wearhouse stores beginning around Thanksgiving, and the full collection will be in all stores by the first quarter of next year.

“The question is, how quickly can we get to $500 million?” Ewert said.

As part of the acquisition of the label, Men’s Wearhouse bought JA’s U.S. factory in New Bedford, Mass., which employs 450 people. Ewert has said he considered the factory one of the prime assets of the deal and it will allow the company to produce and market clothing that is made in America and also jump into the lucrative made-to-measure business. The factory can turn a made-to-measure suit within 10 days.

The acquisition will also allow Men’s Wearhouse to better fight in the promotional ballpark that defines U.S. retailing. “We’ve been promotional since the recession,” Ewert said. “We were everyday low price before.” Having the Joseph Abboud label exclusively will provide “tremendous ammunition to attract a whole new customer and upsell our existing customers to higher prices,” he said.

Abboud said getting the company’s sales force on board will be key. “If they believe in it, they will sell it,” he said. “They can sell up.”

The Joseph Abboud label will be among the highest-priced product offered at Men’s Wearhouse stores. Although price points have not yet been established, the company sells Vera Wang tuxedos for $799.99, according to its Web site, and Lauren by Ralph Lauren suits for $649.99. But the average out-the-door price of a suit at Men’s Wearhouse is $250.

Although the piece goods will be Italian, Abboud said, the suits made at the Massachusetts factory and the hangtags will proudly proclaim they were Made in the USA “in our Joseph Abboud factory in the heard of New England.” The hangtags will include Abboud’s signature at the bottom.

“It’s like dying and going to heaven,” Abboud said of the opportunity to blow out the collection. “This is the next chapter [for Men’s Wearhouse],” Abboud said. “With our size and critical mass, we’re going to be the clothier to America.”

Men’s Wearhouse expects to buy nearly 1 million yards of fabric for the factory in order to meet the forecast demand, which Ewert said will ultimately be a “number with two commas in it.”

“And I used to think 600 or 800 yards was a lot,” Abboud said with a laugh.

Anthony Sapienza, who had been ceo of JA Apparel under its former owners, is overseeing the factory and the production for Men’s Wearhouse. “Tony is fantastic,” Abboud said. “He’s a great guy, and a Red Sox fan, and so committed to the factory.”

Abboud, himself a Boston native and die-hard Red Sox supporter, said the factory’s workers are similarly committed. “They feel the same energy and excitement we feel,” Abboud said. “We’re not an investment firm. We’re committed to American clothes and fashion.”

Ewert added: “That’s the secret sauce of this organization, the dedication and enthusiasm of our employees. We have over 1,000 stores, and the average tenure of our store managers is over 10 years.”

The acquisition immediately brought the factory to full capacity. “We sell 1.7 million suits a year and the factory makes 250,000 suits a year,” Ewert said. “We hope to create demand to increase production.”

When Men’s Wearhouse bought Moores in Canada in 1998, the acquisition included the Golden Brand factory in Montreal. Men’s Wearhouse closed that factory in 2008. Ewert has no plans to repeat that decision.

“We’re planning to keep this running forever,” he said of the New Bedford factory. “It’s going to be worth a lot of money when you look at what we’re planning to do with this brand.”

Men’s Wearhouse has the clout to immediately move the needle. When it introduced Black by Vera Wang tuxedos into its stores in spring 2012, volume hit $150 million within the first six months, Ewert said, with just two styles and only rentals to spur sales.

For the Abboud label, the company intends to launch a major marketing initiative around the introduction of the full lifestyle collection early next year, which should also boost interest and sales.

Ewert said the company is most definitely considering opening stand-alone Joseph Abboud stores down the road. “It’s too soon to talk about it, but we’re thinking about it,” he said.

The ceo wouldn’t discuss whether the company plans to promote the Abboud merchandise as aggressively as it does its other labels. Men’s Wearhouse and its rival Jos. A. Bank have raised eyebrows with their promotional cadence, particularly around the holidays when Bank has infamously offered “buy one, get seven free.”

“In this environment, the consumer still needs a call to action,” Ewert said. “They want great quality for great value, and BOGO [buy one, get one free] is still very effective. But not everything in the store will participate.”

Abboud interjected: “The customer will benefit from the price-value relationship. We plan to lead with amazing style, not price.”

Using Abboud himself in the company’s advertising is also an open question for the company. Rumors were rampant this summer that one of the sparks of the battle with Zimmer is that the company was positioning the designer as its style authority — which didn’t sit well with Zimmer, who had been the face of the brand since he started the company in Houston in 1973 with $8,000 in cash, a cigar box to hold the money and $100,000 in inexpensive double-knit sport coats that his father loaned him.

“We will certainly use [Joseph’s] name and reputation,” Ewert said. “He’s the voice of authentic authority.”

For right now, the company’s ads are showing merchandise and lifestyle content — and they’re not using the famous tag line. “We’re not using it right now,” Ewert said. “But we still have the right to use it if we want. The ads are just as effective without a spokesman.”

Abboud added of the Abboud collection: “It’s not about celebrity, but credibility and quality. It’s not some made-up concept. It’s going to have a voice. That’s why the consumer goes to heritage brands.”

In addition to the Joseph Abboud label, the company envisions growth at both of its core divisions: the flagship Men’s Wearhouse chain as well as Moores in Canada.

Ewert said the company plans to open 100 full-line Men’s Wearhouse stores within the next several years. The outlet potential is also substantial. “We have eight now, and that could potentially be 100 stores,” he said.

“Moores is great,” Ewert said. “It’s the dominant men’s retail in Canada with 120 stores.” He noted that the Vera Wang product is actually even more successful there than in the Men’s Wearhouse stores and he’s anticipating the Abboud product to also find followers there quickly. He noted that Jack Victor will be manufacturing the Joseph Abboud suits at its factory in Canada for that market. “Canadians are just as proud of Made in Canada as Americans are of Made in the USA,” he said.

Men’s Wearhouse is moving slowly on the international front, however. “We’re focused on our domestic opportunities: adding 200 more stores and the Joseph Abboud brand,” Ewert said. “We think there’s still tremendous growth here. But give us a minute and we’ll figure it out.”

One division with a cloudy future for the company is K&G Superstore. Ewert said the company is “still in the middle of evaluating” the future of the 97-unit chain. “We’re exploring alternatives,” he said.

The company had tested separate big and tall stores, but those have since been folded into the core Men’s Wearhouse units. “Big and tall is still 25 percent of our business,” Ewert said, “and we’re still one of the biggest big and tall players.” But separate stores just didn’t work.

The quiet corporate apparel division is also successful and currently holds a number-one market share position in the U.K., where it bought a majority interest in Dimensions Clothing Limited and certain assets of Alexandra plc in 2010.

Over the years, the company has made a number of acquisitions to add to its stable. In addition to Moores and K&G, it has purchased Kuppenheimer, C&R Clothiers, Joseph & Feiss and others.

More acquisitions could be in the future.

The company is rumored to be a potential acquirer of Allen Edmonds, the high-end shoe brand. Ewert declined to comment, but sources said the firm is indeed interested. Buying Allen Edmonds would play into the retailer’s core strength as a specialty store operator and its customer service expertise. According to one source, there are only two categories of men’s wear that men purchase for themselves — suits and shoes — so this could create some solid synergies. However, because Men’s Wearhouse operates in the middle market and Allen Edmonds is more of an affordable luxury brand, sources speculate that if Men’s Wearhouse buys the brand, it would operate separately from the core business.

“We get presented with a lot of opportunities,” he said. “But it has to make sense and be in our sweet spot. We have to be able to leverage our strengths, elevate our brands and appeal to our demographic. That’s why JA was the perfect opportunity.”

Today, 45 percent of what Men’s Wearhouse carries in its stores is exclusive brands, and Ewert said that number could rise to between 60 percent and 70 percent within the next few years. “We can do that with the brands we already have,” he said.

One thing that is a perpetual source of pride for the retailer is its strong company culture.

“George started the company with the notion that high-quality customer service starts with an engaged employee,” Ewert said. The notion has gained strength for 40 years, landing the company on Fortune’s Top 100 Companies to Work For list 12 times since 2000.

“Our senior executives have an average tenure of 20 years, and I’ve been here 18 years,” he said. Although Zimmer had traditionally been at the forefront of the efforts to meet and inspire the workers, traveling personally to dozens of parties around the country every holiday season to dance and have a bite with the employees, the culture remains intact even after his departure. “It takes more than one person to keep a culture alive,” Ewert said. “I spend a lot of time in the stores and do town-hall meetings with 200 store managers. It’s important for all leaders to stay connected to their stores and their employees.”

So what does Ewert believe the next 40 years will hold for The Men’s Wearhouse? “We have a very strong company, a healthy balance sheet and a rich culture,” he said. “It will continue to get richer and stronger every year. And I look at the future as somewhat of a blank canvas.”


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