Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Ken Dennard – DRG&E

Neill P. Davis - Chief Financial Officer, Principal Financial Officer, Executive Vice President, Treasurer

George A. Zimmer - Chairman of the Board, Chief Executive Officer

Analysts

Betty Chen – Wedbush Morgan Securities

Richard E. Jaffe – Stifel Nicolaus

David M. Mann – Johnson Rice & Company

Laura Champine – Cowen & Company

Brian J. Tunick – JP Morgan

Janet Kloppenberg – JJK Research

Susan Sansbury - Miller Tabak & Co.

The Men’s Wearhouse, Inc. (MW) Q2 2009 Earnings Call September 9, 2009 5:00 PM ET

Operator

Welcome to The Men’s Wearhouse second quarter 2009 earnings conference call. During today’s presentation all parties will be in a listen only mode. Following the presentation the conference will be open for questions. (Operator Instructions) As a reminder, the conference is being recorded today, Wednesday, September 9, 2009. I will now turn the conference over to Mr. Ken Dennard with DRG&E.

Ken Dennard

Thank you, operator. Good afternoon everyone. Welcome to The Men's Wearhouse second quarter 2009 earnings conference call. Today’s call will begin with a brief review of the second quarter results and financial guidance summation by Neill Davis, Executive VP and CFO. George Zimmer, Chairman and CEO will then provide strategic commentary before opening the call to your questions.

We will be making a number of forward-looking statements and all such statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions mentioned today due to a variety of factors that affect the company including the risks specified in the most recently filed Form 10-Q and Form 10-K. This call is copyrighted material to The Men's Wearhouse and cannot be rebroadcast without our express written consent. I would like to turn the call over to Mr. Neill Davis. Neill?

Neill Davis

Thanks Ken. Good afternoon everyone. Earlier today we reported GAAP diluted earnings per share for the quarter of $0.75 which exceeded our guidance of $0.56 to $0.60. The majority of this favorable variance is the result of lower than planned selling, general and administrative expenses and the balance from better than expected gross profit.

The favorable to plan gross profit results were driven by stronger comparable store sales particularly traffic levels at our Men's Wearhouse stores. Also contributing to better gross profit levels were lower than planned occupancy and alteration costs. Selling, general and administrative expenses were lower than planned as we realized lower costs across substantially all expense categories as well as a benefit extending from an agreement we entered into in the quarter with a third-party vendor who assumed our unredeemed gift card liability which resulted in the recognition of other income for the gift card breakage.

Now for the details. Total company sales performance in the second quarter of $526.2 million declined 3.5% from last year’s second quarter of $545.3 million. Total clothing sales of $364.3 million declined 5.6% from last year’s second quarter of $386.1 million while tuxedo rental revenues of $129.6 million increased 1.7% over last year’s second quarter revenues of $127.5 million.

Comparable store sales results for the quarter at our Men's Wearhouse stores were a 2% decrease. This was above our expectations for the quarter as retail performed better than expected due to increased customer traffic while we were on promotion. Tuxedo rentals although increasing over the prior quarter were at the low end of our expectations largely due to the continued softness in rental reservations for weddings.

K&G’s comparable store sales decreased 3.6%. Our men’s clothing category at K&G declined in the mid single digit range and our ladies category increased in the high single digit range. In Canada, comparable store sales decreased 3.4% and were in line with expectations.

Gross margin before occupancy cost as a percentage of sales decreased 86 basis points from 59.9% to 59.1%. Decreases in our retail clothing product margins as a percentage of related sales of 245 basis points were driven by a decrease in merchandise margins resulting from customer response to our promotional activities. This rate of decline in margin represents an improvement from the decline realized in the first quarter of 327 basis points.

We ended the quarter with retail apparel inventory below last year by 6.6% which compares to a decline in related sales of 5.6% for the quarter. Occupancy costs decreased on a dollar basis by 0.9%. It increased as a percentage of total net sales by 36 basis points moving from 13.5% up to 13.9% primarily due to the de-leveraging effect of reduced comparable store sales.

Selling, general and administrative expenses were $173.9 million in the quarter and $198.9 million in the prior year. Excluding the $3.2 million pre-tax other income from gift card breakage, adjusted SG&A expenses of $177.1 million decreased 7.6% from the prior year’s adjusted SG&A of $191.6 million which excludes $7.3 million in costs associated with the closing of Golden brand. The decrease is primarily due to cost cutting measures and operational efficiencies.

As a percentage of total net sales adjusted SG&A decreased 148 basis points from 35.1% to 33.7%. Adjusted SG&A excluding advertising decreased 9.5% from the prior year quarter.

To recap the second quarter results, our diluted earnings per share were better than our expectations as well as that expected by consensus views on Wall Street. Our promotional posture is continuing to resonate with both new and existing customers and is positively impacting gross profit dollars due in large part to our marketing and merchandising initiatives. We are continuing to drive reductions in operating costs and increase efficiencies where possible without decrementing our market share. These things are collectively contributing to our better than expected bottom line results.

Let me now turn your attention to our liquidity and balance sheet. At quarter end our cash reserves and short-term investments were $153.9 million, an increase of $44.7 million over the same period last year. Outstanding debt was $43.2 million with a maturity of February 2011. We finished the first six months of the fiscal year with capital expenditures of $28.8 million and we expect to be at the higher end of our initial guidance range for the full year.

That covers the review of the quarter. Let me now turn your attention to our guidance for the third quarter of the fiscal year. We anticipate our third quarter comparable store retail apparel sales to be down in a range of 2-3% and our comparable store sales for tuxedo rental revenue to increase 1-2%. At the beginning of the fiscal year we had reported that when we initiated our elevated promotional posture we expected retail clothing product margins would decline year-over-year as we moved through the year.

However, the pace of that margin drag would moderate sequentially until such time as we anniversary the fourth quarter. That said, gross margin before occupancy costs for the third quarter are expected to be below the prior year. However, the rate of decline for the third quarter is expected to be less than that realized in the second quarter.

We anticipate third quarter occupancy costs to be flat. The benefits of cost controls and operating efficiencies will continue to be realized in the third quarter. However, the rate of change will diminish as we approach and anniversary our response to adverse macro economic conditions that accelerated in the third quarter of last year.

Selling, general and administrative expenses before marketing expenses, so this is excluding marketing expenses, for the third quarter are expected to decline 4-5% when compared to prior-year costs excluding $1.8 million in costs associated with the prior-year closing of our Canadian based manufacturing facility, Golden Brand. We will continue to make increased investments in our marketing programs in support of our strategies of delivering stronger values for our customers in the quarter.

Our effective tax rate for the third quarter is expected at 33% down from the prior year comparable period of 38%. Therefore, we expect third quarter diluted earnings per share to be in a range of $0.27 to $0.30.

That wraps my commentary on the numbers. I will now turn the call over to George Zimmer, Chairman and CEO for his comments before opening the call to your questions. George?

George Zimmer

Good afternoon. In the fourth quarter of 2008 we learned that at Men's Wearhouse and Moores a highly promotional strategy was effective in gaining unit sales and gaining market share in our dominant clothing category, suits. Therefore, facing the ongoing challenging macroeconomic environment we planned our 2009 business accordingly. The plan we have executed to achieve the top and bottom line results you have just heard from Neill has been and continues to be to have our marketing promote suits and our tuxedo rental business while cutting costs including payroll without sacrificing our significant competitive advantage; our employee-focused culture.

From my seat as founder and CEO the departure from our historic path of everyday low prices has been as successful as it was gut wrenching to implement. So I am encouraged and confident the changes we have and continue to refine in our pricing and marketing strategies are creating value that our customers are responding to very positively.

According to industry sources, the suit business in the U.S. for the first half of this year is down double digits in units over the prior year period. In contrast, our suit business in dollar terms is up 4.1% and in unit terms up 23%. Clearly we are growing our market share.

Even in the promotional environment we are now in including the fact we are selling more units, our merchandise team is focused on cost savings and buying better without affecting the quality of the merchandise we sell. Therefore, over time we will continue to see gross margin improvement as inventory is replenished. We have improved our value proposition by lowering our product margin to protect market share and our vendors have done the same.

Our other significant source of business, tuxedo rentals, has also been increasing year-over-year. Our market intelligence suggests that the overall wedding industry which drives approximately 70% of our rental business is soft if not slightly down year-over-year. Therefore, our tuxedo numbers suggest we are growing market share albeit at a slower rate than tailored clothing. At MW Tux we continue to rationalize our square footage and reallocate capital into merchandise that should help the customer experience and improve store sales productivity.

Our team at K&G has significantly outperformed their volume targets for the first half of the year with a 7.5% increase over plan in sales per gross square foot. Our increase over plan is the result of a significant improvement in our ladies business, upgrades to our store look and feel and an increased marketing spend and brand awareness.

Our Moores team in Canada is exceeding their first half volume goals and due to the factory closing is considerably more profitable than last year. Our management team and work force have really done a great job at focusing in on cost containment and process improvement. This has required a significant effort and I am pleased with our progress.

Before I open the call to your questions I want to conclude with this observation. You have heard from Neill what our sales expectations are for the third quarter. While the rate of decline in our same store sales is expected to continue to abate, projected comps remain negative. Since I founded this company I have experienced numerous business cycles and their impact on Men's Wearhouse. The reality is our business tends to lead the decline in business cycles and lag during the upturn. With that in mind, our approach to the management of our business and our expectations about results has been and will continue to be a conservative one.

We will take your questions now.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Betty Chen – Wedbush Morgan Securities.

Betty Chen – Wedbush Morgan Securities

I was wondering in regard to the guidance for the third quarter it looks to me we are really looking for a sequential deceleration whether even on a two-year basis. I was curious if you have seen some variance in the business since altering the promotional cadence so far in the third quarter and how that may be changing. Then also the tuxedo rental business, is the softness primarily due to more conservative budgeting from wedding parties or do we think potentially there is a little bit of cannibalization going on given the compelling offers you are having on the tailored suiting side?

Neill Davis

Relative to the deceleration or peer deceleration our peer deceleration two-year comp trends as you describe, I would call your attention to a comment George made relative to how we trace through business cycles and the fact that we tend to lag those cyclical upturns and our outlook for the third quarter is trying to take some of that into consideration as best we can.

However, it does appear that during the first half of the year the value that we have offered our customers with our offerings has been very well received particularly if you reflect on the statistics that George indicated relative to unit growth, we would like to believe those will continue in the third quarter at a very healthy clip but in this environment when we are dealing with such high levels of unemployment, as we are, and we continue to lose jobs, we are taking as George said a conservative posture going into the third quarter.

Relative to the tuxedo rental business, I would offer that we believe it is more a function of the conservativeness of the wedding party as opposed to wedding parties feeling they can buy suits as an alternative to the rental business. George do you want to add a comment to that?

George Zimmer

No, that has got it.

Operator

The next question comes from the line of Richard E. Jaffe – Stifel Nicolaus.

Richard E. Jaffe – Stifel Nicolaus

A question about the Men's Wearhouse and tuxedo business and the introduction of casual apparel. Anecdotally it looks good. It seems to be a deeper and broader assortment than I have seen in the past and commentary suggests it is working well. Can you comment how you feel about the assortment and what you have done so far? How pervasive is it through the chain and what would we hope to see in the next 12 months?

George Zimmer

Right now we put denim products in all close to 1,100 Men's Wearhouse and Men's Wearhouse Tuxedo stores. We have also brought in a t-shirt and other younger types of sportswear. What we are finding is that some of our stores are doing well with this type of product but not all stores are doing well. So we continue to investigate other ways of stimulating sales in our tuxedo rental stores. I will just leave it at that.

Richard E. Jaffe – Stifel Nicolaus

Related to the cost of clothing, obviously with the promotional cadence and the margin preservation you are seeing it appears you are paying less for clothing or being able to get better values. Do you see that trend continuing through the balance of this year and is it similar for both K&G and The Men's Wearhouse stores?

George Zimmer

Yes, in a word.

Operator

The next question comes from the line of David M. Mann – Johnson Rice & Company.

David M. Mann – Johnson Rice & Company

Over the last couple of quarters one of your regional competitors, S&K, basically liquidated. Can you talk a little bit about what you are seeing in those markets in terms of any kind of sales lift? Also any other regional trends especially in the markets that have the highest unemployment?

George Zimmer

Well in S&K, it was a very diverse company and by that I mean geographically. Their penetration was different throughout the country. So that has to be factored in and it becomes very difficult to make a single statement. I would say the following: In markets that had an S&K the Men's Wearhouse stores are in the top third of the comp increases that we are experiencing. I think that has got it.

David M. Mann – Johnson Rice & Company

In terms of the guidance for the third quarter can you clarify why the tax rate would be so much lower?

Neill Davis

We closed out certain state tax audits and as a result there was a favorable outcome for the company.

Operator

The next question comes from the line of Laura Champine – Cowen & Company.

Laura Champine – Cowen & Company

I wanted to walk through Q2 a little bit more given the EPS up side relative to the guidance was pretty significant. Sales wasn’t really much upside and also the tux business with its higher margins came in a little weaker. I noted in your comments that you mentioned most of the upside was lower SG&A expense relative to what you thought you would see coming into the quarter. Can you give us a little more detail around that?

Neill Davis

We have also indicated that $3.2 million related to the gift card breakage, realization of another income item to offset the SG&A. We had anticipated certain costs in our pursuit of an acquisition in the second quarter that did not materialize. That was in our outlook and fortunately we were able to get reimbursed for that spending. Those two things added together make up a big chunk of the SG&A savings. Those two things…

George Zimmer

I was going to say there was significant reductions in our travel, entertainment and courier expenses I believe as well.

Neill Davis

Beyond those two one-time items when you go through all of our expense structure we have continued to make and realize significant reductions beyond what we had anticipated. I think that in large part relates to a comment that George observed on our last earnings call which is when you have an organization of 14,000 employees moving in the right direction, clearly understanding what our objectives are from a holistic standpoint, everybody is towing the line. I believe you are seeing the impact of that. I also want to be clear at the same time about SG&A as we walk into the third quarter the rates of change will abate because you and I know and everyone else on the call knows that the market began its meltdown in September of last year and we began an immediate or had an immediate reaction to that within our results of operations primarily at the payroll line.

We are going to begin to anniversary some of these changes. That is what I would offer to you. There were some one-time events. There were some ongoing savings for the reasons I described and those were the real drivers to the results for the quarter.

Operator

The next question comes from the line of Brian J. Tunick – JP Morgan.

Brian J. Tunick – JP Morgan

I think last quarter at this time you had just made a bid for Filene’s Basement. I am just trying to understand now your thinking about K&G here. Obviously you were very enthusiastic about the off price channel. What do you think happened here in Q2? Was it primarily the men’s business that slowed versus comps last quarter and do you still view K&G as a growth vehicle on its own even if you can’t find another acquisition?

Secondly, maybe as we move into Q4 and into next year and we anniversary the BOGO events here what kind of IMU opportunity do you see and should we start thinking product margins will start showing increases as we get into next year?

George Zimmer

Let me start by saying that we do believe that K&G is a growth vehicle. In fact, we believe it is our best growth vehicle. That doesn’t mean we are going to be adding stores in the near term because of the macro economic conditions. We are making changes in K&G in terms of do we think K&G can make it as a standalone brand. We believe it can. We are adding in fact more brands into our assortment, something we observed at Filene’s, and we are also bringing in selected, more expensive goods into selected stores. So I think we are trying to move K&G more in that direction, in the direction of a Filene’s.

Neill Davis

I would also offer to the question Brian had relative to the comp result for the second quarter relative to the comp we produced in the first quarter it might be suggested that some deteriorating accelerating trend, Brian you need to go back and look at last year’s comps. We had a much more difficult comp in the second quarter last year than we did the first. I think that should be taken into perspective when you think about that cadence.

Relative to your question about longer term margin profile, I think George somewhat answered that question. Over time we continue to expect to see gross margin improvement as inventory is replenished as our merchants are continuing to focus on getting better value through lower cost. Our vendors are behind us because they want that unit volume for the longer term so they can leverage their fixed costs in their organizations. So longer term, yes I believe that is possible.

Operator

The next question comes from the line of David M. Mann – Johnson Rice & Company.

David M. Mann – Johnson Rice & Company

Can you clarify what the marketing spend should look like for the rest of the year and for the full year?

George Zimmer

I don’t have the actual dollar number but it is going to be I am sure more than it was last year. Is that correct Neill?

Neill Davis

We particularly just want everyone to understand we have elevated our investment in marketing. We believe that is a key element in how we position what we are trying to do for the balance of the year. I am not in a position to articulate our specific spending as we go into the back half. Suffice it to say we are incurring significant savings in all other expense categories to more than adequately fund those investments and still realize a reduction in SG&A dollars year-over-year.

David M. Mann – Johnson Rice & Company

In terms of tuxedo rental, we are hearing out in the channel that Joseph Banks is looking at possibly getting into that business. Can you just comment on how you may be prepared to deal with additional competition there?

George Zimmer

Well, I have reason to believe the former CEO was not happy that Joe Banks was going into this business. We welcome the competition and I would say that they should think this through very carefully.

Operator

There are no further questions at this time. Please continue with any closing comments.

Neill Davis

Once again, we thank everyone for their interest and their continued interest in The Men's Wearhouse. We look forward to talking to you again next quarter.

Operator

This does conclude the Men's Wearhouse second quarter 2009 conference call. We thank you for your participation today. If you would like to listen to a replay of today’s conference you can do so by dialing 303-590-3030. Thank you for your participation. Have a very pleasant rest of your day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: The Men’s Wearhouse, Inc. Q2 2009 (Qtr End 08/01/09) Earnings Call Transcript
This Transcript
All Transcripts