Jos. A. Bank Clothiers faces a growing shareholder revolt as demonstrated by an institutional investor's open letter last week calling for the Hampstead-based retailer to return its growing cash reserve to owners of its stock.
BeaconLight Capital LLC, a New York-based investment manager that owns more than 1 percent of Jos. A. Bank, also urged the men's apparel chain to reorganize its board, realign management incentives and drop its strategy of pursuing acquisitions with its cash.
"Our biggest concern is that the company has progressively become more shareholder-unfriendly," said Ed Bosek, BeaconLight's founder, managing partner and portfolio manager, in an interview.
There's a growing wave of shareholders like BeaconLight. Disenchanted stockholders are increasingly working to change a company's structure and strategy — and succeeding, experts said.
BeaconLight's criticisms of Jos. A. Bank, outlined in a letter sent to the board and made public Tuesday, came on the heels of the chain's annual meeting in June, during which 31 percent of shareholders voted against the election of two directors. In a nonbinding vote, shareholders also narrowly rejected pay packages for top executives.
Bosek said the retailer has built up large cash reserves while failing to pay a dividend or repurchase shares.
"Over a long period, because the return on cash is zero, it destroys value," Bosek said. "It would be better to give back to shareholders."
The company did not respond to several requests for comment.
Shares of Jos. A. Bank, which jumped 13 percent to $45.33 Tuesday after the shareholder criticisms emerged, fell 7 percent Friday to close at $41, reacting to an earnings warning issued Thursday after the market closed.
In its letter, BeaconLight said it should be worth $70 per share.
Jos. A. Bank has underperformed its peers and is the cheapest stock among U.S. listed retailers, BeaconLight said. The market has penalized the company for poor use of cash and corporate governance, the investor said, noting a "staggering" $377 million in reserves at the end of the fiscal year. That equals about $13.50 per share or nearly a third of the company's value, BeaconLight said.
BeaconLight also objected to a board with "no truly independent" directors because of members' connections to the company or to the chairman, Robert Wildrick, a former CEO who oversaw company growth. The national chain now runs 612 stores.
Despite the chairman's contributions to growth, "his past success does not entitle him to run the company as a personal fiefdom," said the letter. It called for the addition of independent directors without prior connections to the board or management.
BeaconLight also called on the company to use incentives to reward management for creating long-term shareholder value, to end Wildrick's consulting arrangement and to build up an investor relations department that will foster communication with shareholders.
The campaign is similar to those being waged at other public companies where shareholders have voiced opposition over compensation, strategy and use of cash, said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.
"Shareholder activism has been highly effective of late in changing board composition and function and corporate strategy," he said. "In the end, if you don't like how management is responding, they can put up a slate of their own candidates."
Activists have increasingly become involved with larger value companies, including targets such as Apple Inc. and Hess Corp., according to SharkRepellent.net, a website that provides corporate research.
The shareholder discontent at Jos. A. Bank comes amid sharp drops in profits. The company warned Thursday that its second-quarter earnings are expected to decline to about 49 cents to 53 cents per share, compared with 83 cents per share in the second quarter of 2012. Total sales fell about 11 percent in the three-month period that ended Aug. 3.
"Customers did not respond as well to some of our highly promotional, high sales volume marketing campaigns as they did in the prior year," CEO R. Neal Black said in a statement.
Earnings for the first quarter, which ended May 4, slid 45 percent to $8.1 million, or 29 cents per share, from $14.8 million, or 53 cents per share, a year earlier. First-quarter sales slipped 2.6 percent to $196 million.
In June, Black outlined a strategy to strengthen performance by moving away from the deep discount promotions as well as boosting online sales, attracting customers who wear big and tall sizes and continuing to expand full line and outlet stores.
Bosek, who said BeaconLight has been a shareholder for about three years, said Jos. A. Bank stopped communicating with shareholders entirely last year.
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"The company has said it is looking for acquisitions, but they have not given any details," he said.
He said he hopes more shareholders unite before the company moves to make acquisitions and before the next shareholders meeting, likely in May or June.
If so, "it's going to become clear to this board they are unelectable," he said. "If others got their views to management, that would be great."
One analyst said last week he agrees with BeaconLight's main points, though he believes the $70 per share projection is high.
"That's predicated on getting back to peak margins, and we don't see that happening for many years down the road," said Mark Montagna, a senior analyst with Avondale Partners, a Nashville, Tenn.-based investment firm. "They're having to retrain the customer on the new promotions."
If sales and earnings continue to decline, Montagna said he would expect "you'll have more and more shareholder pressure. Eventually that shareholder pressure will probably result in change."