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

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

Analyst for Brian J. Tunick – JP Morgan

Janet Kloppenberg – JJK Research

Laura Champine – Cowen & Company

Bruce Zasser - Advisory Research

The Men’s Wearhouse, Inc. (MW) F3Q09 Earnings Call December 8, 2009 5:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to The Men’s Wearhouse third quarter 2009 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Ken Dennard, DRG&E. Please go ahead, sir.

Ken Dennard

Thank you, [Mykala] and good afternoon, everyone and welcome to The Men's Wearhouse third quarter 2009 conference call. Today’s call will begin with a review of the third quarter results and a financial guidance summation by Neill Davis, Executive Vice President 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 today 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 P. Davis

Thanks, Ken and good afternoon, everyone. As we reported shortly after market close today, our quarterly total sales increased modestly, approximately one half of 1% over the prior year. Earnings before interest and taxes on a GAAP basis increased 26.5%. Excluding prior year costs associated with the closing of Golden Brand, our manufacturing facility in Canada, earnings before interest and taxes would have increased 17.6%.

Continued sequential improvements in the rates of change and gross profit margins and effective cost management are helping drive year over year improvements in profitability within the backdrop of very weak macroeconomic conditions and very soft consumer confidence levels. Our free cash flow for the year-to-date period was approximately $118 million and our cash and cash equivalent levels reached approximately $200 million at quarter end.

Let me now offer further insight in our results for the quarter and conclude with details and perspectives on the final quarter of the year.

Comparable store sales in the United States declined 40 basis points and our Canadian business increased 190 basis points. These results were stronger than what we had anticipated going into the quarter. Key drivers to the year over year changes include: one, continued strength in our suit product category in the United States, with unit and dollar comp sales increasing in the quarter by 17% and approximately 9% respectively. Our call to action has and continues to be effective.

Second, an increase in traffic levels at K&G owing to our operating efforts and focus of brand at a price and trend right product assortments specifically within our ladies product offerings. And north of the board, our Canadian sales have held up better than plan, also driven by the strength in our suit product offerings and a similar promotional lead in that category that we have pursued in the U.S. As in the U.S., the strength of our dominant category, suits, is helping mitigate otherwise weak traffic levels.

Tuxedo rental revenues for the quarter increased 1.2% which was in line with our guidance range of an increase of 1% to 2%. Although this result and recent trending within our tuxedo rental business is modest, we believe such results in the face of extremely difficult employment and economic conditions impacting the 20- to 30-year old consumer demographic are driving market share gains nonetheless.

Our same-store sales trend on a combined two-year basis, trend basis, for our U.S. businesses for the third quarter decreased 12.7%. That compares to a 10.4% decrease and 13.2% decrease in the second and first quarters of fiscal 2009 respectively. Many of you on this call tend to focus on this statistic and its sequential trending quarter to quarter. That being said, I believe it important then to have a clear understanding about the seasonality dynamics of our business that can and will impact any such sequential valuation. The seasonality that I refer to relates to out tuxedo rental business, as well as our retail sales promotional cadence.

Our promotional cadence is elevated in the second quarter due to our summer sale event in June, which was extended through July this year, and the second quarter is of course the seasonal peak of our tuxedo rental business.

Gross margins before occupancy costs for the third quarter decreased 50 basis points to 59.5%. This compares to a rate of decline of 86 basis points in the second quarter and a rate of decline of 196 basis points in the first quarter. For the year-to-date period, gross margins before occupancy costs have declined 108 basis points.

The year over year declines are primarily related to adjustments in our merchandising strategies initiated at the end of fiscal 2008 to drive market share gains in the men’s clothing business, particularly our dominant category, suits.

Selling, general and administrative expenses before marketing costs declined 4.8% from the prior year adjusted level, which excludes $1.8 million in Golden Brand closure costs. This level reduction was in line with our expectations going into the quarter.

In summary, gradual improvements in the rate of decline in both top line and gross margins, coupled with significant cost reductions, have enabled a 134 basis point and 86 basis point improvement in operating income margins for the third quarter and nine months year-to-date respectively.

From a balance sheet perspective and cash flow perspective, our inventories have declined 3.5% from prior year levels, and as I said at the beginning of my remarks, free cash flow for the year-to-date period is approximately $118 million and cash and cash equivalent levels are approximately $200 million.

Those are the key financial highlights for the quarter. Let me now turn your attention to our fourth quarter outlook.

We anticipate comparable store sales at our Men’s Wearhouse stores to decline in the low-single-digit range. At K&G, we are targeting a flat to a decrease in the low-single-digit range, and in Canada a flat to a low-single-digit increase.

Included in this outlook is a low-single-digit decrease in our tuxedo rental revenues for the fourth quarter. This relates to the anticipated negative effects of a calendar shift in the Christmas holiday and the anniversary of the Presidential inauguration in the prior year.

Sales expectations for our corporate uniform sales business units we refer to as Twin Hills will be down year over year. This outlook stems from a reduced business activity at a number of Twin Hills existing customer accounts. This reduced level of business activity will negatively impact the fourth quarter diluted earnings per share by approximately $0.02.

Gross profit before occupancy costs for the fourth quarter is expected to decline in the low-single-digit range from the prior year as we begin to anniversary a more aggressive posture and strength in our value proposition for our customers.

Gross margin gains from our alternation services will diminish in the fourth quarter as we will increase payroll levels to appropriate standards in light of the heavy unit volume and suit sales, as well as anniversary the significant unit growth in suits in the prior year quarter.

Occupancy costs are expected to be flat to a low-single-digit decrease in the fourth quarter in absolute dollar terms.

Selling, general and administrative expenses for the fourth quarter are expected to be in the range of flat to a 1% increase from the prior year. Excluding advertising costs and $8.8 million and $1.8 million in the prior year associated with the gain on sale of a distribution center and a pretax non-cash fixed asset impairment charge, respectively.

With the fourth quarter, we will anniversary our primary cost reduction strategies initiated in the prior year. In addition, based on higher than planned sales results for the full year, we anticipate higher incentive based store related payroll than in the prior year.

This guidance includes an estimated effective tax rate of approximately 39% for the fourth quarter. I do want to mention that in the prior year, we realize an income tax benefit for the quarter due to favourable developments of certain outstanding income tax matters, as well as a true-up of the tax provision for the full year. We estimate that the true-up of the tax provision for the full year to have benefited the prior year fourth quarter by approximately $0.07 in diluted earnings per share.

The company’s effective tax rate then for the current fiscal year is now estimated at 36.8%. Weighted average fully diluted common shares outstanding are estimated to be 52.5 million for the fourth quarter and 52.3 million for the full year.

For the fourth quarter, we would expect GAAP loss per common share to be in the range of $0.15 to $0.19. Compared to the prior year quarter loss per common share, adjusted to exclude the impact of the gain on sale of assets, impairment charge and tax true-up of a $0.13 loss.

Before turning the call over to George, I want to leave you with a final thought on the numbers. Earlier in my prepared remarks, I made mention of the diminished level of tuxedo rental revenues in the fourth quarter of this year which are calendar and event driven, and the lower level of business at Twin Hill. Both are negatively impacting this year’s fourth quarter by approximately $0.04 in diluted earnings per share.

That said, a more comparable year over year comparison for our core businesses for the fourth quarter outlook would be a loss in a range of $0.11 to $0.15 for the current year to last year’s results of an adjusted loss per share of $0.13.

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 A. Zimmer

Thanks, Neill. Well, after hosting many company holiday parties, albeit this year’s parties are less costly because we are trying to be responsible without losing our corporate culture, and after visiting many markets, I am confident that we are poised for a strong 2010, assuming the economy cooperates.

For those of you participating on the call who are long-term investors, my faith in our strong corporate culture has been confirmed by the enthusiastic spirit of our store-based employees, despite a second year of lacklustre business with individual employees earning about the same now as in 2007.

In top line volume, K&G is our best-performing division versus plan and we have established a significant ladies business, enjoying low double-digit increases year-to-date. Of equal importance, we’ve been testing a new tuxedo rental promotion which is increasing wedding reservation deposits significantly, although the formal wedding numbers are down nationally in the high-single-digits, we are running a 2% comp in tux rentals for the year and next year’s comp should be stronger, regardless of what our current or future competition does.

And finally, our e-commerce site traffic and business is surging after a software stumble earlier this year. As a technology luddite, I accept responsibility for Men's Wearhouse's lateness in aggressively entering into Internet marketing and social networking. It will not happen again.

Next year our website will do more volume than any Men's Wearhouse store, close to $10 million. And that’s a clean $10 million. When customers are in our store and want a garment transferred store to store, that’s how our system treats it, as a store sale. Some companies use their websites to transfer and consider the sale an Internet sale. If we shifted our store transfers to Internet sales, it would shift $50 million.

And what about the short-term plan? We continue to expect further industry consolidation -- not on the scale of an S&K but reflective of a jobless recovery. Our stores located near former S&Ks are obviously outperforming our average stores and we expect that to continue in the first half of 2010 until we anniversary S&K’s closing.

Which brings me to market share -- although interim numbers are not available, we know how many suits we’ve sold and how many tuxedos we’ve rented, both in the United States and Canada. As we said last quarter, we believe our market share is up, both in suits and tuxedo rentals. This year, we will sell and rent about 6 million suits and tuxedos, split equally between the two -- not too bad in a recession.

However, in the final analysis, it will be a multi-year process through continued market share gains, gross margin expansion, and expense leverage to return to our historical double-digit operating margin profile. Additionally, if comps become positive, the timeframe for achieving double-digit EBIT will shorten.

Thanks, we’ll now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Betty Chen. Please state your company name prior to asking your question.

Betty Chen – Wedbush Morgan Securities

I was wondering, Neill, if you could clarify or just to make sure that I heard correctly your gross margin guidance for the fourth quarter -- I heard that I think you had said we should be looking for gross margin or occupancy to be down low-single-digits as you anniversary some of the promotions last year. If I recall correctly, I thought that gross margin had been impacted last year because you implemented the BOGO offer; however, this year I had expected perhaps [including] product margin to be a little bit more favourable as you have had more time to kind of preplan for the anniversary of BOGO. So any color on that would be very helpful. Thanks, Neill.

Neill P. Davis

Certainly, I’ll give you some observations and George could add to it, if he feels like I am not covering the full base. I mean, we are taking the point of view, and I’ll take you back to our initial premise going into the year, was market share growth and positioning of strength for the company. We have taken a point of view of continuing to be aggressive -- very aggressive in the fourth quarter, maybe more so than what you had contemplated in order to maintain that aggressive posture in front of our customers for the fourth quarter because we still are operating at a difficult economic environment, you are still dealing with a 10% unemployment and we don’t believe it’s time to rest and we are going to be aggressive.

That said, even if the relative gross margins decline, we are hopeful this strategy will drive incremental gross profit dollars and we will see what the results are as we wrap up the full quarter but I think what you are seeing here, at least going into it is a more aggressive promotional cadence than what you may have anticipated.

George, did you have anything to offer to that?

George A. Zimmer

No, I think you nailed it there, Neill.

Operator

Your next question comes from the line of Richard Jaffe.

Richard E. Jaffe – Stifel Nicolaus

A couple of questions -- Neill, you referred to the advertising costs or excluded advertising costs and I’m wondering what your thoughts are about the marketing side of the equation, how it went or how gratified were you by the 3Q spend and what you anticipate 4Q to be, either dollars or change year over year or directionally, whenever you care to comment on.

George A. Zimmer

Richard, it’s George and you know, I’m more connected to the advertising flow than Neill, so let me just say that we are going to be spending more money in the fourth quarter of 09 than in 08 in advertising, so we are not taking advantage of advertising leverage opportunities -- in fact, we are doing just the opposite and have throughout the entire year.

Our position is that much as with margin, that until we have clear signs that the consumer is spending freely without promotion, we are guaranteeing that we will get our business by marketing heavily and promoting heavily.

Operator

Your next question comes from the line of Brian Tunick.

Analyst for Brian J. Tunick – JP Morgan

This is actually [Ika] in for Brian. Neill, I have a question about the advertising that you did this quarter relative to the first half in terms of the BOGO designer suit versus the BOGO free. What exactly did you see in terms of traffic levels once you changed the offering and what was it material to the comp?

George A. Zimmer

You know, one of the interesting aspects of marketing this past year has been that the buy one get a second one for $100 outperforms buy one, get one free. One of the other I think advertising points that I’d like to make is that although we are happy with the progress we are making at K&G, we are making an advertising change and we’ve retained a new ad agency by the name of the Mullen Group, and we are very excited. We’ve been working on some new K&G commercials which will preview later this winter.

Operator

(Operator Instructions) Your next question comes from the line of Janet Kloppenberg.

Janet Kloppenberg – JJK Research

I’m a little confused on the IMU -- is your IMU the opportunity for higher IMUs, is that diminishing, Neill, for the fourth quarter? And maybe George, if you could talk about what it looks like, you or Neill, what the IMU opportunity looks like for next year versus some pretty good gains here in fiscal 09. Thanks.

George A. Zimmer

Well, let me just say sort of generically that there aren’t that many people left selling men’s clothing in a significant way, so when we look at our primary competitors, Macy’s, Joseph Banks, we see opportunities to grab some margin in initial markup simply because there are large voids at those price points in the marketplace. However, as you know, the initial markup in today’s environment is less important than the net selling price and so that’s a different story.

Operator

Your next question comes from the line of Laura Champine.

Laura Champine – Cowen & Company

Hate to beat up the merchandise margin line but that is where we thought we would see better guidance this quarter. With the department stores having inventory as well-controlled as it seems to be, I’m just surprised that you are being this promotional. Your inventories look in line. Any -- Joseph banks is always promotional, so there’s nothing new there. I mean, is there a certain -- do you have shipments of inventories coming in which are higher than you would now have if you had it to do over again or what are we missing?

George A. Zimmer

I think it’s more that if we were not to be promotional, even though others may be the same, we believe we would do less business.

Laura Champine – Cowen & Company

Okay, so in this environment, even though you are going up against an easy comparison, you will see a slight decline but it would be worse if not for the discounting -- is that the right way to think of it?

George A. Zimmer

Well, not necessarily in the margins but in the dollars.

Operator

We have a follow-up question from the line of Richard Jaffe.

Richard E. Jaffe – Stifel Nicolaus

Just a follow-up question on K&G -- you mentioned the women’s business growing and could you talk about where the balance of that business is, men’s versus women’s, and where you see it ending up? And if you could also comment on the balance of the mix, national brand versus secondary brands?

George A. Zimmer

Well, women’s has grown from 18% to almost 22% of total sales. It’s not still in every store. I believe there are 15 of 106 stores that do not have women’s. And men’s is about 75% where we do a few percent in children’s and miscellaneous product. I would assume that -- I don’t have exact numbers but all categories, and this always adds to 100, will grow next year at the expense of men’s, which will continue to shrink.

Operator

(Operator Instructions) Your next question comes from the line of Janet Kloppenberg.

Janet Kloppenberg – JJK Research

George, I was wondering if you could elaborate on that comment you made about the BOGO free doing less well than the BOGO buy one for $100 -- it must be different product on sale. I mean, why would they pay $100 if they could get it free?

George A. Zimmer

It’s different product supporting each event but I believe the big driver is actually the employee buy-in. The employees strongly preferred buy one, get a second one for $100 and that may be most of the reason why it outperforms buy one, get one free. But there are product differences.

Operator

We have a follow-up question from the line of Betty Chen.

Betty Chen – Wedbush Morgan Securities

I was wondering if we could look a little bit farther out, George and Neill, as we think about 2010 and obviously the environment remains quite volatile, should we continue to expect that the company will focus on maintaining market share and therefore continue to be quite aggressive with the marketing and promotional TAMS going into next year?

George A. Zimmer

I would say the answer would be not quite. We will be promotional -- not quite as promotional as this year.

Operator

We have a question from the line of [Bruce Zasser]. Please state your company name followed by your question.

Bruce Zasser - Advisory Research

It’s Bruce Zasser at Advisory Research. We are a shareholder in Men's Wearhouse. In light of the strong performance of the company, particularly on cash generation and the large amount of cash on the balance sheet, is the company giving any consideration to possibly a special dividend or buying back stock? For example, if you used $50 million of that cash right now, you could buy back -- well, since the stock went down in the after market, which is a positive if you are buying back, you could buy back about 5% of your stock or do a $1 special dividend. I wanted to hear your thoughts on that.

George A. Zimmer

Well, of course, I think I am still the largest private shareholder so I don’t think I would object too strongly but I don’t think it’s the right move for the company and the shareholders, and the reason is that I believe there are going to be opportunistic situations, not just in 2010 but beyond and I think that in this type of market, it almost is that Warren Buffett strategy, when others are scared, we want to be aggressive and you need cash to be aggressive.

Operator

Thank you. And at this time, management, please continue.

Ken Dennard

We appreciate everyone’s attention today for our third quarter results and we look forward to reporting the fourth quarter in a couple more months.

George A. Zimmer

And we want to wish everybody a Merry Christmas -- try to visit one of our stores. Thanks.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. This conference will be available for replay until December 15th at midnight. You may access the replay system at any time by dialling 303-590-3030, with the access code of 4187917#. We thank you for your participation and at this time, you may now disconnect.

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 F3Q09 (Qtr End 10/31/09) Earnings Call Transcript
This Transcript
All Transcripts