Shareholders owning 6.3 percent of Perry Ellis International, Inc.'s outstanding shares took their efforts to break up the apparel and brand management company public late Tuesday by publishing a letter they sent to the company's board of directors a month ago.
ADVERTISEMENT The Oct. 16 letter, which was sent by Perry Ellis Legion Partners, LLC (Legion Partners) together with California State Teachers' Retirement System (CalSTRS), recommended the company's board of directors appoint a special committee and hire an independent investment bank to assist it in evaluating strategic alternatives.
Legion Partners and CalSTRS said they released the letter because the board had refused to form the committee and because discussions with fellow shareholders made it clear that many Perry Ellis shareholders "are unhappy with the status quo and want to see substantial change.
"We believe there is serious interest in Perry Ellis from strategic buyers, and that the Board has a fiduciary responsibility to objectively evaluate all viable alternatives to maximize value for all shareholders," said Chris Kiper, Managing Director of Legion Partners. "This evaluation process must consider the risk profile of alternative courses of action from Perry Ellis' current strategy. We are concerned that the status quo, under the leadership and control of the Feldenkreis family, entails a very high risk that Perry Ellis will continue to underperform, causing irreparable value destruction for shareholders."
The letter notes that Perry Ellis' three largest segments, which make or sell apparel under the Perry Ellis, Jantzen, John Henry, Original Penguin, Gotcha, Farah, Savane, Pro Player, Laundry, Manhattan and Munsingwear brands, continue to lose money. Those segments are Men's Sportswear and Swim, Women's Sportswear and Direct-to-Consumer segment. Only the company's Licensing segment, which reported operating income of $6.38 million in the second quarter ended Aug. 2, is profitable. Perry Ellis is expected to reported its third quarter earnings Thursday morning.
The full text of the letter follows:
October 16, 2014
Board of Directors
Perry Ellis International, Inc.
3000 NW 107th Avenue
Miami, FL 33172
Ladies and Gentlemen:
We are writing on behalf of Legion Partners and the California State Teachers' Retirement System, who jointly own 982,091 shares which represents 6.3% of Perry Ellis International, Inc.'s ("Perry Ellis" or the "Company") common stock, to formally request that the board of directors of Perry Ellis (the "Board") form a special committee to explore strategic alternatives. We are concerned over what appears to be a lack of commitment at Perry Ellis to take the necessary steps to ensure optimal long-term value for all shareholders, and we believe it is critical at this juncture that the Board be open to all alternatives for enhancing shareholder value.
As we have delineated in our meetings with management and members of the Board, we strongly believe Perry Ellis has significant underlying intrinsic value not reflected in Perry Ellis' current stock price. This view has not changed; in fact, we are even more convinced of this point as we have continued to talk with numerous market participants and gained an even greater perspective of views about the Company. The intrinsic value of Perry Ellis is being obscured by the fact that three of the Company's four operating segments are losing money and there has not been a detailed, credible plan communicated to shareholders outlining a path forward to achieve an acceptable level of profitability.
The long-term stock performance and underlying operational performance of Perry Ellis have both been extremely poor. See Table 1 below for a comparison of Perry Ellis common stock to its peers and selected market indices, and Table 2 below for a comparison of Perry Ellis on key operational margin metrics to the same peer group. In our view, the performance of Perry Ellis demonstrates significant long-term execution and leadership deficiencies that have led to its dramatic underperformance, and unless addressed, will continue to undermine value.
As part of our due diligence process, we have endeavored to identify the key drivers of this long-term, pervasive underperformance. Our analysis includes direct engagement with management and the board, as well as garnering input and knowledge from other shareholders and a broad constituency of people with informed perspectives. Based on this process, we have come to the conclusion that a combination of the Company's governance structure, poor alignment and incentives, and the dominant family control present in management and at the board level is the root cause for the performance issues which are plaguing the company. We believe these issues must be addressed in a comprehensive manner, and that minor fixes around the edges are simply too little too late.
In our view, it is one of the Board's most critical functions, and central to its fiduciary duty to oversee management, strategy, and performance in an objective and independent manner. It was our sincere hope that following the several meetings and discussions we held with management and members of the Board that it would undertake a serious review of strategic alternatives. We consider this not only a rational step given the Company's long track record of poor execution and significant underperformance, but also, quite frankly a clear duty under your fiduciary obligations.
A course of action by which the Feldenkreis family is enabled by the Board to perpetuate the status quo or simply transition leadership to the next generation with no serious, objective, and thorough strategic review, risks continued and likely more permanent value destruction. We believe shareholders of Perry Ellis would strongly embrace a thorough and objective review of all strategic options, but only if it is clear that all reasonable alternatives will be openly considered, and this is not just an exercise in protecting the family's position.
In this light, we believe the following steps are necessary and appropriate, and hereby formally request the Board to undertake the following:
Appoint a special committeeFormally hire an independent investment bank to assist the special committee in evaluating strategic alternativesBased on our discussions with shareholders, including many calls we have received since we filed our initial 13D, it is clear to us that shareholders are unhappy with the status quo and want to see substantial change.
Sincerely,
/s/ Chris Kiper
Chris Kiper
Managing Director
Legion Partners, LLC
