Executives
Ken Dennard - Co-Founder, Chief Executive Officer and Managing Partner
George A. Zimmer - Co-Founder and Executive Chairman
Diana M. Wilson - Interim Chief Financial Officer, Executive Vice President of Finance & Accounting and Treasurer
Douglas S. Ewert - Chief Executive Officer, President and Director
Lewis J. Derbes - Chief Financial Officer, Senior Vice President and Treasurer
Analysts
Brian J. Tunick - JP Morgan Chase & Co, Research Division
David M. Mann - Johnson Rice & Company, L.L.C., Research Division
Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division
John D. Kernan - Cowen and Company, LLC, Research Division
Janet Kloppenburg
Betty Y. Chen - Wedbush Securities Inc., Research Division
Susan R. Sansbury - Miller Tabak + Co., LLC, Research Division
The Men's Wearhouse (MW) Q4 2012 Earnings Call March 14, 2013 9:00 AM ET
Operator
Good day, ladies and gentlemen. Thank you for standing by. Welcome to Men's Wearhouse Fourth Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Ken Dennard. Please go ahead, sir.
Ken Dennard
Thanks, Richard, and good morning, everyone. We appreciate you joining us for Men's Wearhouse conference call to review 2012 -- fiscal 2012 fourth quarter and full year results, also the company's outlook for fiscal 2013 and the discussion of events subsequent to the close of fiscal 2012.
Before I turn the call over to management, I have the normal housekeeping details to run through. For those of you who do not receive your e-mail of the earnings release yesterday afternoon from me or would like to be added to that list, you can contact our offices and my contact information is in yesterday's release. Also, there will be a replay of today's call via webcast on the company's website, which is, of course, menswearhouse.com, in the Investor Relations section. There's also a telephonic replay available for a week. Any information for dial-up, for that feature is in yesterday's release.
Please note that information reported on this call speaks only as of today, March 14, 2013, and therefore, you are advised that time sensitive information may no longer be accurate as of the time of any replay listing or transcript reading. In addition, the comments made by management of Men's Wearhouse today during the conference call may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of the management of Men's Wearhouse. However, various risk, uncertainties and contingencies could cause actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener or reader is encouraged to read the company's Annual Report on Form 10-K, its quarterly reports on Form 10-Q and current reports on 8-K to understand those risk, uncertainties and contingencies.
Now with that behind me, I'd like to turn the call over to Men's Wearhouse Founder and Executive Chairman, George Zimmer. George?
George A. Zimmer
Today, Ken, and good morning. I'd like to start by thanking Diana and her team for doing such a great job while we've been searching for our new CFO. We believe in Jon Kimmins, that we have found someone who will be an excellent member of our senior team and will enhance our strength overall, not just in the finance area. Before Diana adds her comments to our press release from yesterday evening and Doug provides some color to our results, I'm going to comment on how I look at last year and the coming year.
I spent a good part of this February and early March speaking to and with all our management teams, including our Vice Presidents and Senior Executives from all of our operating divisions and all of our Men's Wearhouse retail store managers and assistant managers, as well as those individuals managing our tuxedo rental business totaling 3,000 people during 12 different meetings, 250 employees each. A high degree of engagement among our employees, particularly at the store level, is nothing short of amazing to me given the economic challenges retail workers, like many other Americans, face daily. This is why we have again been voted on to the Fortune 100 best companies to work for list. In fact, last year, we ranked 50th, which was the highest we've ever been ranked, making us among the highest ranked retailers.
This employee buy-in supports our marketing and merchandise strategies and the combination leads to spectacular customer service, higher average transactions and more UPTs. I believe our modest single-digit increase in EPS, despite being below our historical growth rate, is impressive in the face of the macroeconomic environment, negative political environment and intense competitive environment.
As we look back on our first 40 years, we are pleased with our bricks-and-mortar stores. We recognize that over the next 40 years, the new hybrid model, combining bricks with clicks, will evolve. Just as we have demonstrated that we can successfully integrate tuxedo rental and tailored clothing, we are confident we could integrate our stores with the Internet.
Now I'll turn the call over to Diana.
Diana M. Wilson
Thanks, George, and good morning, everyone. In our press release issued yesterday evening, we reported our results for the 2012 fourth quarter and full year. We also announced our engagement with Jefferies for exploration of strategic alternatives for K&G, as well as our new $200 million share repurchase program, our planned credit facility amendment and our annual guidance for fiscal year 2013. I will provide some commentary on the numbers, and then along with Doug, we'll address your questions. As I discuss the numbers, please note that the comparisons will be to prior year adjusted amount and comparable store sales will be on a 52-week basis.
First, for our fourth quarter results, which include the 2012 53rd week. Despite both economic and weather-related consumer headwinds, our consolidated total sales increased 8.2% or $46.3 million over last year's fourth quarter, with retail segment sales up 6.8% and corporate apparel segment sales up 21.5%. Comparable store sales were also achieved -- I'm sorry, comparable increases were also achieved in gross margin dollars, with the retail segment total gross margin up 6.7% and the corporate apparel gross margin up 28%. The consolidated gross margin was up $18.3 million or 8.1%, and our total gross margin rate was essentially flat.
With the inclusion of the 53rd week, our SG&A expenses increased by $19.2 million or 8.3%. This exceeded the $18.3 million increase in gross margin and resulted in a net loss per diluted share of $0.07 compared to an adjusted net loss per diluted share of $0.05 in the prior year fourth quarter. These results were also $0.02 lower than the low end of our guidance given on December 5, 2012, due mainly to the consumer headwinds noted previously. We estimate that the 53rd week contributed diluted earnings per share of $0.03.
As we discussed in our third quarter conference call, the fourth quarter started out with a significant decrease in customer traffic in November. While this trend did moderate somewhat, they continued through the fourth quarter with a greater impact than anticipated in each of our retail brands. Comparable store sales increased 1% at Men's Wearhouse, at the low end of our guidance range, with much of the increase resulting from a 9.4% comp sales increase in U.S. tuxedo rental revenues due primarily to increased rental rates. At Moores, comp sales decreased 5.5%, well below expectations, due mainly to decreased traffic. While Canadian tuxedo rental revenues increased also, the mix of total sales was much less than at Men's Wearhouse and therefore, did not have a significant impact on total comp sales.
At K&G, we had a decrease of 5.7% in comparable sales, with both traffic and unit sale per transaction down from the prior year. We believe that the spending power of our customers for this brand continues to be constrained and has resulted in less-than-expected responses to our promotions and marketing campaign. As already mentioned, we have begun a process to explore strategic alternatives for K&G.
In our corporate apparel segment, fourth quarter sales increased by $11.5 million or 21.5% and gross margin increased by $4.1 million or 28%. The sales were higher than prior year due to additional rollout activity in managed accounts and higher Alexandra sales, with the 53rd week contributing most of the increase. The increase was also higher than guided due to increased sales to several TwinHill managed accounts.
Now let's turn to the full year numbers. Total sales increased $105.6 million or 4.4% and total gross margin was up $59.2 million or 5.6%, which was a 51 basis point increase over the prior year due mainly to a favorable impact from tuxedo margin and occupancy leverage. SG&A was up 6.1% over the prior year or 4.4% excluding the 53rd week. The SG&A increase was primarily due to payroll-related costs and increased advertising.
Our diluted earnings per share for the year was $2.55. Adjusted for the 53-week, it was $2.52, which compares to an adjusted prior year diluted EPS of $2.38, a 5.9% increase. Men's Wearhouse had annual comp store sales of 4.8%, driven primarily by an increase in the average selling price, but more than offset a decrease in traffic. Moores' 1.5% comp increase was also due to an increase in average selling price, as well as increased units sold per transaction that more than offset the decrease in traffic. K&G had a comparable store sales decrease of 4.3% due to decreased traffic, fewer units sold per transactions and a slightly decreased average selling price.
Our cash flow for the year was very strong as is our cash position. Our inventories finished the year down 2.8% from the prior year, as the prior year included an inventory build in response to over sold levels. Capital expenditures were $121.4 million and included a significant investment in new stores and remodels of existing stores, as well as the purchase and build-out of a corporate facility in Fremont that will be completed this year.
I will now discuss our guidance. As noted in the press release we issued last evening, we are modifying our full guidance practice this year and will be giving annual guidance only. Given the particular sensitivity of our customers to the uncertainty of the economic environment, it has become difficult to accurately predict near-term results. We are, therefore, going to give annual guidance only as we believe this, along with our quarterly reporting of actual results, will allow interested parties to effectively monitor and assess our performance.
For fiscal year 2013, we expect our diluted earnings per share to be in a range of $2.70 to $2.80, as compared to the prior year 53-week results of $2.55. Compared to the estimated 52-week results for fiscal year '12 of $2.52, this is an increase of 7.1% to 11.1%. This guidance does not take into consideration any strategic decisions related to K&G, any share repurchases or any other investment opportunities we may pursue. Our expectations for comparable store sales, gross margin and SG&A are already set forth in our press release.
Retail margins are expected to be flat to slightly up on a year-over-year comparison. Retail clothing product margins are expected to have a basis point increase that will be offset by a similar decrease in tuxedo rental margin due to an expected increase in rental product, planned retirement and increased royalty payments. Occupancy cost as a percentage of sales are expected to be flat compared to the prior year.
Corporate apparel margin is expected to increase significantly as a percentage of sales due primarily to sales to new U.S. managed account customers acquired in fiscal year '12 and the favorable customer sales mix.
SG&A increases are expected to moderate this year with an increase of 3.4% to 3.9% over the prior year, excluding the 53rd week, resulting in expense leverage of 30 to 48 basis points from improved cost management.
On the balance sheet, we expect inventories to increase over the prior year end, but at a lesser percentage than sales and mainly as a result of increased Men's Wearhouse stores. Our capital expenditures estimate for 2013 is in the range of $100 million to $108 million, mainly because of additional new Men's Wearhouse stores to be opened this year, remodels of existing stores and the completion of improvements for our new Fremont corporate office facility. We are expecting to open 32 to 36 Men's Wearhouse stores, 3 Moores stores and 1 K&G store and to close 36 Men's Wearhouse and tux stores and 4 K&G stores in fiscal 2013.
We are also in the process of amending our current credit facility, which we expect to complete in mid-April. Under the amended facility, we will increase our revolving credit facility to $300 million, with possible future increases to $450 million under an expansion feature. And we'll also extend the maturity date by 2 years to 2018. In addition, the amended facility will provide for a $100 million term loan, which would, if drawn, be repayable over 5 years with 10% payable annually and the remainder due at maturity. The other terms of the planned credit facility will remain substantially similar to those included in our current facility. We currently have no debt outstanding under the existing revolver other than Letters of Credit totaling approximately $22.3 million, which will continue in place under the amended facility.
That concludes my remarks. So I would like to turn the call over to our CEO, Doug Ewert. Doug?
Douglas S. Ewert
Thank you, Diana, and good morning, everybody. Through most of 2012, we were pleased with our business and looking forward to a strong finish to the year. Our disappointing fourth quarter results were a function of very weak November traffic levels, which we believe were caused mostly by external influences. We assume the most significant disruptions came from the economic uncertainty caused by fiscal cliff concerns and the ongoing economic dislocation that our customers face.
The storm in the East was yet another factor, but we saw customer traffic mostly normalize in January. As Diana mentioned, we finished the year with a 5.9% increase in diluted EPS, which we believe was a significant achievement in the current environment. However, despite the market's current gains, continued economic uncertainty causes us concern, and we, therefore, believe a cautious outlook for 2013 is prudent.
I want to highlight some significant investments and personnel additions in 2012 that will have a lasting impact on our future growth. We opened 33 new Men's Wearhouse stores, including 4 Men's Wearhouse outlet stores and 3 new Moores stores during the year. We further enhanced our brand by remodeling over 100 of our stores. Additionally, we invested in merchandise and cross channel marketing messaging, primarily targeting a younger audience and saw both new and existing customers respond enthusiastically to our offerings in modern and slim fit clothes. We also formed an exclusive partnership with Vera Wang and introduced contemporary tuxedos featuring premium fabrics in both modern and slim fits and saw rental levels far exceed our expectations.
We added more people and processes to improve customer satisfaction, reducing our average online order fulfillment time from 3 days to less than 1 day. We invested in technologies to increase customer engagement and launched improved website functionality and cross channel communications on social media, e-mail and SMS. We also released mobile applications for our tuxedo customers, and we increased our central inventory to support our web business and provided functionality to our store employees so they can add web items to in-store transactions to increase customer satisfaction and transaction values.
To support our local communities and enhance our brand perception, we added additional advertising to our fourth annual suit drive and collected 130,000 gently used garments and distributed them to disadvantaged men through 200 nonprofit partners. We made 2 very significant personnel moves. We named Joseph Abboud Chief Creative Director to design exclusive brands and products for our customers. Joseph's vast experience will dramatically improve our ability to add trend-right, high-margin product.
As we announced last week, Jon Kimmins has accepted our offer to become Executive Vice President, Chief Financial Officer and Treasurer, effective April 4. Jon's responsibilities will include finance, accounting, treasury and investor relations. He'll report to me and will be based, here in Fremont. Jon brings over 30 years of experience in public and private company financial management, as well as global retailing, business development, risk management and real estate. He comes to us from Li & Fung's U.S. operations, where he was Executive Vice President of Finance and Operations. Li & Fung is a multibillion wholesaler of apparel footwear and fashion accessory. After joining in its early stages of development, Jon built the company's financial controls and cash management processes, as well as established innovative financial arrangements. Prior to Li & Fung, Jon was Treasurer and Executive Vice President with Toys "R" Us and prior to that, nearly a decade in financial management positions at Macy's.
We're very excited to have Jon join our team. His strengths don't lie only in numbers, but he has built organizations, led acquisitions, developed strategic initiatives and focused on developing people. We look forward to his contributions to further enhancing our organization and our strategy. Jon will hit the ground running when he begins as CFO on April 4.
This year, we're celebrating our 40th year in business. There is so much to celebrate, but I'd highlight some recent recognitions we're proud of. A store likability study revealed that Men's Wearhouse has an 80% likability score among consumers, which is 16% higher than our next closest national competitor. In addition, website yougov.com conducted a year-long survey to rank all apparel brands with the highest positive consumer perception, and Men's Wearhouse ranked 4th overall, behind Victoria's Secret and others and above all of our direct competitors. And as George reported, for the 12th year, Fortune Magazine and our employees recognized us as 1 of the top 100 companies to work for.
As we look forward to 2013 and beyond, we see opportunity to grow our business by leveraging and investing in our strong brands and service culture. We believe we can profitably operate approximately 750 full-line Men's Wearhouse stores, 250 Men's Wearhouse tuxedo stores, 125 Moores stores and possibly, 100 Men's Wearhouse outlet stores. We will continue to grow our sales by providing great products and compelling value to young men, starting with their high school prom and staying relevant for all of their apparel needs throughout their adult life. We'll grow our margin by investing in unique partnerships, an exclusive brands and world-class design and manufacturing talent. As George mentioned, we're investing in technologies that integrate our stores and online purchases and therefore, increase our customer's lifetime value.
In sum, our plan is to grow our market share by driving customer and employee engagement through these investments in people, training, technology, stores and creative content. As you read in yesterday's release, our board and executive management team have embarked upon a process of reevaluating the company's operating structure and capital allocation program. We believe that our core strength lie primarily on our service culture in men's specialty retailing and that we will be better able to focus our efforts on these core operations by taking appropriate actions, thus we have engaged Jefferies & Co. to assist us in evaluating strategic alternatives for our K&G operation.
Additionally, and as Diana mentioned, the board has approved a new share repurchase program of $200 million, which amends and increases the company's existing share repurchase authorization, and we have a planned increase in our borrowing capacity of up to $550 million. As a whole, these actions will better position the company for growth and will unlock value for our shareholders.
The authorization of our large share repurchase program signals our belief that we believe our investments will produce significant returns. We believe the stock repurchase will boost EPS, helping our investors in the present, while our other investments will benefit all stakeholders well beyond 2013.
In summary, while short-term growth is modest as a function of external economic headwinds, we are committed to investing in our future as the premier men's apparel specialty store. We're focusing on investments that will produce significant mid- and long-term growth through raising both product quality and margin, enhancing loyalty through world class customer service in our stores and through integrated technologies, investing in talent and growing our store base. We believe we have the people, resources and balance sheet to support all of these efforts and remain very optimistic and excited about our next 4 years.
Before going to your questions, I want to reiterate that the annual guidance that Diana reviewed does not take into consideration any strategic alternatives for K&G or any share repurchases. We will address any material events that might affect our annual guidance when we report subsequent quarterly results.
I'll now turn the call over to the operator for your questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from the line of Brian Tunick with JPMorgan.
Brian J. Tunick - JP Morgan Chase & Co, Research Division
I guess 2 questions. I guess first, on the K&G side, we've estimated that K&G makes money; it's a low single-digit margin business. So just wondering, maybe you could help us out as we try to think about either on the gross margin or on the SG&A line sort of how K&G compares to the rest of the retail side. And then maybe if you could talk about sort of what's happening on the SG&A line. It sounds like it's coming in a little better than we thought for 2013. And just sort of wondering from a variability perspective, what comps do you guys need to get leverage, and what's the flexibility or thought process on marketing spend in 2013 versus 2012, particularly on the BOGO events? Are there a lot more incremental days left that you guys can run BOGO, either on TV or in the stores?
Douglas S. Ewert
Thank you, Brian. Well, for K&G, we don't break that out separately. K&G is a profitable business for us, and I would point out that in spite of the 4.3% comp decline in 2012, we actually made more money in 2012 than we did in 2011. And as we've been communicating for the last couple of years, we're operating this business for profitability. The stores that you've seen us close have been unprofitable stores. We've been managing the expenses very closely. We've been managing the inventories very tightly to control the margin and the performance has been reasonable. It's not as accretive to us as our full-line specialty stores. As far as marketing, I'm not prepared to disclose what our messaging strategies are going to be for the year, but I can tell you that in this environment and in the categories that we operate, we're clearly in a promotional business. We're going to remain a promotional retailer, and I would think that the marketing spend would be somewhat similar to last year. But beyond that, we're not prepared to disclose.
Diana M. Wilson
With regard to the SG&A expenses, Brian, we don't do the calculation in that manner. We approach it from the cost management side, with the expectation that we will build leverage if we build sales.
Operator
And our next question comes from the line of David Mann from Johnson Rice.
David M. Mann - Johnson Rice & Company, L.L.C., Research Division
I understand the rationale about the change in sort of your guidance policy. I guess a couple of sort of questions on that. First of all, a lot of retailers have talked about the environment since the end of January, with delayed tax refunds and how that's affect traffic trends. Can you talk a little bit first, about what you're seeing in the business since your fiscal year end? And then secondly, just looking out over the year, can you just call out any quarterly nuances that we might be -- that we should be aware as we model quarter-to-quarter?
Douglas S. Ewert
Sure, David. We had -- we had what we consider a strong January. In February, February got off to a slow start for us. We were comping negatively in all 3 retail divisions up until about President's weekend, and then business turned positive. We've been basically positive since. And so we see business somewhat normalizing since President's weekend, overall. As far as quarterly fluctuations, there aren't any significant ones that we're aware of other than to point out that Easter shift has traditionally influenced the timing of the prom business. So we should -- we would expect some pull forward at the tux business from Q2 into Q1 this year.
David M. Mann - Johnson Rice & Company, L.L.C., Research Division
Okay, great. And then sort of for my follow-up question, can you talk about, in terms of the buyback, how you're looking at approaching it in terms of how aggressive you might be willing to be? I mean the stock was clearly at a fairly attractive price during the fourth quarter and you didn't buy any. So how should the investors think about how you're planning on deploying the capital, how aggressive you might be?
Lewis J. Derbes
Well, David, that's something we have to evaluate as we move into the period if we will be able to buy the stock. We will assess that and make our decisions based on what the market conditions are and within the authorization of the $200 million. But that's a significant authorization and we'll be working with it very closely.
Operator
And our next question comes from the line of Richard Jaffe from Stifel.
Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division
Just some follow up thoughts in terms of the mix, suits versus sportswear, and private label versus branded. I know you've been able to lift gross margin, or rather merchandise margin, despite the leverage, or de-leverage, on occupancy. I'm wondering how that mix shift can play out or continue. And then the balance within the stores to emphasize more sportswear or more casual apparel and de-emphasize the nested suit business; I'm wondering what your thoughts are with that, particularly as your customer base grows younger. And lastly, if you could spend a minute on the Internet and how you see that business developing. It would seem to me it's tougher to sell a suit on the Internet than it is to sell separates or sportswear and wondering how that business is developing for you.
Douglas S. Ewert
Thank you, Richard. Well, we're seeing positive movement in our businesses, both on the dress and the casual side. Modern fit is still about half of our business and is very strong. Slim fit now is about 30% of our business and growing very aggressively. We actually forecast slim fit to be north of 40% of our business this year or by the end of the year. And we also saw growth in casual pants and in sportswear this last year. So we're excited about the way we're improving our ability to penetrate our customers' closets into the weekend, so to speak. As far as the mix of exclusive brands versus public brand, we, right now, as an overall, 45% of our business is done in exclusive brands. We see opportunity to grow our margins over time by increasing that mix and bringing talent on, like Joseph Abboud, is going to give us the ability to do that. So we are actively looking to acquire brands. We are actively talking about building brands that we can manufacture ourselves, they're margin rich. That gives us exclusive products for our customers, and now, with a talent like Joseph, really more of a designer influence. And so we're excited about those opportunities long term for us. As far as the Internet, we've seen the Internet develop in our business relatively slow over the years as you've talked about. Although 2012 was a pretty big year for us; we picked up a fair amount of volume and the way we did that was by putting functionality into our stores to allow our store employees to access our extensive online inventory and combine it with in-store transaction. And we really see that's how our Internet strategy is going to unfold, as leveraging our service culture and our store locations and our knowledgeable sales force with an extensive online inventory and really provide a unified approach, much more integrated as we move forward.
Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division
How much of your Internet business is being done through the store for you versus coming at -- coming from of the home computer, if you will?
Douglas S. Ewert
Well, a very large portion of it is done through the stores. But I will tell you that moving forward now, starting with 2013, we are going to include our online business in the store comps. It's that significant. So that's a change in strategy -- or policy for us. And so it will be included in store comps now moving forward.
Operator
And our next question comes from the line of John Kernan from Cowen.
John D. Kernan - Cowen and Company, LLC, Research Division
Doug, you mentioned that you thought your outlook was fairly cautious for the year. Can you give us some clues in terms of what line item you think you're being the most cautious for the fiscal year guidance?
Douglas S. Ewert
Well, we're being cautious across all the top line numbers that we're forecasting because of the economic uncertainty and the disruption that we're seeing in our business that continues to kind of intensify and then abate. And so not just focusing on one category, we've approached the entire forecast with a sense of caution.
John D. Kernan - Cowen and Company, LLC, Research Division
Okay. And then the corporate apparel business, it looks like you're guiding to some gross margin improvement in that business in fiscal '13. I'm wondering what needs to happen to start moving that -- the profitability in that business back to that double-digit operating margin that you believe that business could generate when you bought it?
Douglas S. Ewert
Well, I would say from a gross margin standpoint, this year, we're seeing a mix exchange. We're seeing some increase, some new business being developed in our TwinHill division of the corporate apparel business, which is more margin rich. We're seeing some mix change in the U.K., in the Alexandra business that is more margin rich. And then long term, I would tell you to really start seeing significant improvements in the overall profitability of our corporate apparel business, we need to see the U.K. really start moving through some of their economic pressures. Diana, do you have anything to add to that?
Diana M. Wilson
No, no. That covers it.
Operator
And our next question comes from the line of Janet Kloppenburg from JJK Research.
Janet Kloppenburg
I just -- to stay corporate apparel for a second. It seems that maybe the U.S. customer base is more a profitable customer or business than the U.K. business. Are there attributes of the U.S. business that can be transferred over to the U.K. business and help gross margins grow there, or are there just some restrictions? And also, what is the outlook for the U.S. corporate business to continue to grow? And for George, I was wondering if you could talk a little bit about your promotional strategy at the Men's Wearhouse and at Moores, whether the BOGO events continue to be effective, and if you think that they are the most profitable way for you to continue to gain share or if we should see any change there? And I was wondering also if you could talk a little bit about the brand mix in terms of some of the more contemporary brands perhaps moving into the mix and some of the classic brands moving out? And how the sportswear business is going?
George A. Zimmer
Okay, Doug, let me take that first part.
Douglas S. Ewert
All right.
George A. Zimmer
Of course, world business is relative and so we're trying to be promotional in a relative sense. And I think it is clear that the more promotional one is, the less each promotion works. And of course, one of our direct competitors is experiencing that problem at a magnitude greater than we are. What our response is, I heard the comment earlier about separates, our opening price garment is a separate, and it sells very well. And I believe that we are looking to bring in another Everyday Low Price garment to move away from Buy 1 Get 1 Free but not eliminate it. In terms of the brands, my only response would be that having Joseph Abboud join our organization has yet to be fully digested. And we think there may be such enormous opportunity there that I think that has to come first.
Douglas S. Ewert
I would add that the corporate apparel -- the margins in the U.S. are not stronger than the U.K. The U.K. is the profit engine of our corporate apparel business. What we're experiencing is the improvement in the U.S. through landing some new business, some new fairly large accounts and better inventory controls and cost management on the U.S. side. So that's really what you're seeing is the influence of the improvement.
Diana M. Wilson
The U.S. business is about 15% of the corporate apparel business.
Janet Kloppenburg
Okay. And can you just address the Canadian business? It really has slowed in the last couple of quarters, and it used to be a pretty steady business. And I'm just wondering, are there new competitors in that market? Are you seeing pricing pressure from other players, et cetera?
Douglas S. Ewert
We're not seeing a significant change in the competitive environment in Canada. I mean, as you know, Target is doing a big roll out there, but they're not a direct competitor. Nordstrom is coming to Canada, but they're not there yet. But what we've found is that the Canadian consumer is not immune to the pressures that the U.S. consumer feels. And the economic uncertainties created in the U.S. have a reaching affect into Canada. One of the things that we have noticed, though, is that we've now seen a traffic decline in our Canadian business for the second December in a roll -- in a row. So we're taking a hard look at our strategies during that time period for next year -- or for this year because we think we have some opportunity there. But for sure, we're seeing a slight weakening of our business in Canada, and I think that's somewhat symbolic of what's happening throughout the country.
George A. Zimmer
And if I could just add, we've been in Canada for over 30 years; Moores has operated there. So we are looking at exploiting our hometown advantage, if you will, as new competitors begin to move in.
Operator
And our next question comes from the line of Betty Chen from Wedbush Securities.
Betty Y. Chen - Wedbush Securities Inc., Research Division
I was wondering, Doug, if you can talk a little bit about the outlet business. It sounds like you're quite positive in terms of the longer-term viability. Could you give us a sense of what learnings you've had so far, and remind us again what will be the business model? Is it mainly clearance or made-for outlet? And how we can think about maybe some accelerate or ramp-up of the outlet concept into the future?
Douglas S. Ewert
All right. Well, we opened the 4 outlets that we have right before Thanksgiving. So there is certainly a lot of noise in the first 90 days or 120 days that we've been in business in our 4 outlets. We're pleased with the traffic that we're seeing coming in these stores. We're starting to understand what the rightsize footprint is. We see some opportunities for improvements in our merchandise mix and in our pricing strategies. But I would tell you that this is not a downflow concept. This is a made-for concept. And there will be some down flow products in there from the core stores, but we're really targeting a different customer with our outlet concept. A customer that shops in outlet centers. A customer that buys their apparel at retailers like Penney's and Kohl's and Sears, and that's really what we're seeing. We're also monitoring closely the potential for cannibalization from the core Men's Wearhouse stores and the initial read on that is that the cannibalization is very low. So there's some encouraging signs we're seeing in our outlet concept. We're not ready to step on the gas. We'll open a few more this coming year as we expand our learnings and tinker with our pricing and our merchandising, and we'll keep you posted. But we see that once we have the formula right, and we have it partially right, right now, but once we have the formula right, we think we can step on that gas and get 100 of these open in fairly short order.
Operator
And we have a follow-up question from the line of John Kernan from Cowen.
John D. Kernan - Cowen and Company, LLC, Research Division
Just on the J.C. Penney side of things, we definitely see a much better product and store assortment at Men's Wearhouse, but do you think you benefited at all and gained some share from the share loss that they had this year?
Douglas S. Ewert
Thanks, John. It's hard to tell. We are -- we did see an improvement this year in our opening price suit business. Maybe some of that came from Penney's, unsure. But it's really hard to tell when we pick-up market share where it's coming from.
John D. Kernan - Cowen and Company, LLC, Research Division
And then one final question. K&G, are there any store closures planned for 2013, any leases there that are coming up?
Douglas S. Ewert
There are 4 store closures that we're announcing for this year.
Operator
And our next question is a follow-up from the line of Brian Tunick with JPMorgan.
Brian J. Tunick - JP Morgan Chase & Co, Research Division
Two follow-ups. First, just on the capital structure, again, is there also a chance that you guys would look at special dividends or continue to increase the regular dividend in addition to the buyback? I guess that could happen. And if you could remind us what your minimum cash balance is that you'll feel comfortable running with. And then the second question is on the occupancy, it looks like this will be the first year that occupancy dollars will actually be growing again. So just curious, how many more tuxedo rental store closings are left to come from here?
Diana M. Wilson
Brian, on the question regarding our capital allocation and our consideration of special dividends or increasing the dividend amount, this is something that the board regularly addresses, and they've addressed it for this first quarter. And we see the result of their deliberations and the decisions that they have made. But that is, as always, an ongoing consideration and deliberation. With respect to the SG&A expenses...
Brian J. Tunick - JP Morgan Chase & Co, Research Division
Occupancy.
Diana M. Wilson
I'm sorry, occupancy expenses. Yes, we expect them to be flat in terms of the basis points. There's some growth. But we're opening stores as we see, we've got 32 to 36 in the plan for Men's Wearhouse this year. So there's a growth in the dollars, but the leverage of it is good.
Brian J. Tunick - JP Morgan Chase & Co, Research Division
Right. Can you just give us an idea of where we are in the tuxedo rental closing program?
Diana M. Wilson
Okay. We've got 36 stores scheduled for closure this year. All of which are basically at the end of their lease terms. Again, we are continuing through the process of rightsizing, if you will, that store count. And we are continuing that process and continue the delivery on these stores, but the ones that are contributing will remain open and the ones that we feel are transferable, the business is transferable to a nearby Men's Wearhouse store, we will close those as their leases come up.
Douglas S. Ewert
Brian, we evaluate each one of these stores as we get near the end of the lease term. We're projecting that we're going to end up with somewhere probably between 200 and 250 of these stores, and so we're getting, obviously, close to that number. But it's a moving target and we evaluate them each month.
Operator
Our next question comes from the line of Susan Sansbury from Miller Tabak.
Susan R. Sansbury - Miller Tabak + Co., LLC, Research Division
Two quickie questions. With respect to Internet, can you share with us what the penetration rate is as measured by a percent of total sales?
Douglas S. Ewert
I would tell you that at the Men's Wearhouse stores, the web business is in the mid, single-digit penetration.
Susan R. Sansbury - Miller Tabak + Co., LLC, Research Division
And your objective for this over the next reasonable time frame, 3 years?
Douglas S. Ewert
Well, we don't -- with the way we're approaching it as an integrated strategy with our stores, we're not going to force a number. We're going to let our customers choose to shop us and whichever way is most convenient for them and it's going to seek a level.
Susan R. Sansbury - Miller Tabak + Co., LLC, Research Division
Okay. All right, so it's going to be higher. The other question is, I know Mr. Abboud hasn't been there for very long, but when can we expect to see a change in this contemporary merchandise assortment, and how is it going to impact the look of the store?
Douglas S. Ewert
Well, you're going to start to see Joseph as a voice of fashion authority in our communications within a matter of weeks. Well, as you know, with the product manufacturing and design cycles for men's apparel, the time line is a little longer than we would like. But we may start to see some of the products that Joseph is developing for us late this year, but it really is a 2014 strategy.
Operator
And our next question comes from the line of David Mann from Johnson Rice. It's a follow-up question.
David M. Mann - Johnson Rice & Company, L.L.C., Research Division
A couple of questions to follow-up on the gross margin guidance. First, in terms of the retail margin, can you talk about where we are in terms of the product cost benefits that you perhaps are seeing, how much more in terms of quarters or years that might -- you might expect to see? And then secondly, in terms of the tux rental, I think you talked about margin being under some pressure there. Can you just elaborate a little more on what's causing that? And how long you would expect that to last?
Douglas S. Ewert
Sure, David. Well, from a retail product margin standpoint, we're continuing to see some improvement as input costs are declining, but it's being offset in 2013 by increased cost on the tuxedo side of the business. So we're reporting margin as a percentage of sales to be flat to up 10 basis points. And then really, just a follow-up on that tuxedo comment. Tuxedo, the new Vera Wang tuxedos are more expensive to manufacture. We get a higher AUR for them and they come with a loyalty charge. So as a percentage of sales, the costs are going up on the tuxedo side. But certainly, the profitability -- the margin dollars are continuing to grow.
Operator
And I show no further questions in the queue at this time. I want to turn it back to management for any closing remarks.
Douglas S. Ewert
We thank you very much for your interest in our company, and we look forward to updating you in about 3 months. Bye, bye.
Operator
Ladies and gentlemen, this does conclude the Men's Wearhouse Fourth Quarter Earnings Conference Call. We appreciate your participation, and you may now disconnect.
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