Men's Wearhouse Fires Co-Founder: Should You Fire Its Stock?

By Will Ashworth | June 21, 2013 AAA

Men's Wearhouse (NYSE:MW) unceremoniously fired George Zimmer as its Executive Chairman June 19. The co-founder is well known as the pitchman for the men's retailer; his termination comes as a big surprise. Is Zimmer's departure a sign investors should head for the exits? Should you fire its stock? I'll have a look.

What's Behind The Move?
Firing George Zimmer from Men's Wearhouse is akin to removing Warren Buffett from Berkshire Hathaway (NYSE:BRK.B). You just don't take out the face of the corporation until he or she is ready to leave. Granted, Zimmer's 3.5% stake isn't nearly as large as Buffett's 21% economic interest (35% of voting), but he still is the seventh largest shareholder. This appears to be nothing more than a blatant move by existing CEO Doug Ewert to consolidate his power.

According to a Form 4 filed June 15, Ewert owns 143,000 shares in Men's Wearhouse, most of which, if not all, were acquired as part of his annual compensation. None that I'm aware of were purchased on the open market with his own money. The fact that Zimmer openly admits he had a disagreement with the board over the direction of the company in recent months clearly indicates that Ewert, with less than a tenth of Zimmer's holdings, had reason to want him gone. Having read Barbarians at the Gate, the story about KKR (NYSE:KKR) buying the former RJR Nabisco in 1988, it's not difficult to understand how this happened, but it's still puzzling as to why it did.

SEE: 4 Top Reasons Why Companies Hire New CEOs

Future Marketing
One of the dangers of using a founder in a company's advertising is that the founder becomes the brand more than the company itself. Anyone who watches an iota of television knows Zimmer's signature phrase, "You're going to like the way you look. I guarantee it." Can they survive without Zimmer's baritone voice and grizzled mug staring into the camera? Sure they can. The question shareholders must ask themselves is why did it have to come down to a terse, non-explanatory, three-paragraph statement on the very day of its annual meeting? If Zimmer's statement is to be believed, and there's no obvious reason why he'd be less than forthcoming, the board could and should have acted weeks ago to fire him. Waiting until the very last minute seems to indicate they thought the problem would simply go away with the passing of time. Big mistake.

Now it has a colossal problem.

The man who co-founded and dedicated 40 years of his life to Men's Wearhouse and is the face of the company to millions of Americans has been kicked to the curb. Do they honestly think he's going to go silently into the good night? What could the board possibly offer Zimmer at this point that would placate him? Frankly, if this happened to me I'd be talking to private equity firms immediately to buy back the business and turf anyone whose fingerprints were on this hatchet job. It boggles the mind that the board could act so callously toward both Zimmer and its shareholders. While it's possible the truth will reveal a fractured business in need of a shakeup, it's also possible that the board has made a serious error in judgment.

Change In Direction
Fortune magazine discussed the dismissal with Mark Jaffe, the head of Wyatt & Jaffe, a Minneapolis-based executive search firm. Jaffe makes the point that the company might have wanted to go in a different direction from a marketing perspective in order to reach a younger demographic and Zimmer was entirely uncooperative to the point of removal. Jaffe further reasons that Zimmer could also have been having a hard time relinquishing control of his baby. That I find harder to believe. Ewert has been CEO since June 2011. If there were a problem it would have come to light by now. The third possibility is that Zimmer pulled a Mark Hurd, the former head of Hewlett Packard (NYSE:HPQ), and it was left with no choice but to cut him loose. That too seems far fetched given the timing.

Bottom Line
At this point shareholders have no idea what's just taken place. Until the board and the company comes clean about the reasons for Zimmer's dismissal, I don't how anyone could vote in favor of a reconstituted board minus George Zimmer. However, given it's performing reasonably well, I wouldn't sell until it's obvious the board has acted improperly or with poor judgement. If, on the other hand, it's revealed that it indeed wanted to secure a younger audience and Zimmer was standing in the way of that, then I'd hang tight and ride out the controversy.

Should you fire Men's Wearhouse? Not yet but I'd have your hand on the trigger just the same.

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