Executives
Ken Dennard - Founder and Managing Partner
Douglas S. Ewert - Chief Executive officer, President and Director
Neill P. Davis - Chief Financial Officer, Executive Vice President and Treasurer
George A. Zimmer - Executive Chairman and Co-Founder
Analysts
Brian J. Tunick - JP Morgan Chase & Co, Research Division
Jerry Gray
Janet Kloppenburg
David M. Mann - Johnson Rice & Company, L.L.C., Research Division
Alex Pham - Wedbush Securities Inc., Research Division
Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division
The Men's Wearhouse (MW) Q3 2011 Earnings Call December 6, 2011 5:00 PM ET
Operator
Ladies and gentlemen, thank you for standing by, and welcome to The Men's Wearhouse Third Quarter 2011 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Tuesday, December 6, 2011.
And I would now like to turn the conference over to Ken Dennard of DRG&L. Please go ahead.
Ken Dennard
Thank you, and good afternoon. Welcome to Men's Wearhouse Third Quarter 2011 Earnings Call. Today's call with management will cover a review of the third quarter results, the outlook for the fourth quarter and the updated outlook for the full year and is followed by a Q&A session.
Please note that management 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 Forms 10-Q and Forms 10-K -- Form 10-K.
And now I'd like to turn the call over to Doug Ewert, President and Chief Executive Officer. Doug?
Douglas S. Ewert
Thank you, Ken. Good afternoon, everyone, and thank you for joining us today. Joining me on today's call is George Zimmer, Executive Chairman; and Neill Davis, Chief Financial Officer.
I'll begin the discussion of our third quarter followed by an update of various strategic initiatives I discussed on our previous call. Neill will then take you through the details of our third quarter financial result and provide you with our fourth quarter and full year 2011 financial guidance. George, Neill and I will then entertain your questions after that review.
I'm aware that there has been much anticipation within the investment community during this most recent quarter concerning the sustainability of our promotional and related marketing strategies as the third quarter marked the first year anniversary of those strategies. There has also been some concern surrounding our tuxedo rental business due to the projected rate of growth provided at the beginning of the third quarter, which some may have observed as the beginning of a decelerating growth trend.
In the third quarter, we generated a 6.3% total net sales growth rate, which drove a 14.1% increase in gross profit dollars, coupled with continued operating expense leverage and produced a 50.4% growth rate in adjusted operating income, and as a percentage of sales, a 310 basis point increase to 10.6%. We believe these results, as well as our initial start to the fourth quarter, based on actual results from November should significantly diminish those concerns.
Our retail clothing same-store sales growth rate at our core brand, Men's Wearhouse, increased 7.2% in the quarter, which was up against a 6.7% increase in the prior year. Customer traffic trends, as we track those via our customer loyalty program, Perfect Fit, are increasing at similar rates. The overall strength in the men's wear industry, coupled with our value offerings and high brand awareness, are driving continued growth in all of our product categories, with particular strength in sport coats, dress shirts, sportswear and accessories this past quarter.
Our retail tuxedo rental same-store sales growth rate in the U.S. increased 1.9% in the third quarter as compared to our initial expectations of a flat to 1% growth rate. As reflected in our press release today, we expect fourth quarter tuxedo rental same-store sales to increase in the range of 14% to 15%. Including actual results from November, we have approximately 94% of our fourth quarter plan under reservation.
All in, we're pleased with this year's performance. However, we remain on the offensive. Soon we will be announcing a new licensing arrangement we entered into during the third quarter with a well-known apparel brand, specifically designed for our tuxedo rental business. We believe that alliance, which our customers will begin to experience in fiscal 2012, will further strengthen our existing dominant market share position. Details of that alliance will be forthcoming later this month.
K&G generated a 1.6% same-store sales growth rate in the third quarter, which represented a modest acceleration on a 2-year basis from the second quarter of this year. Although our comp sales outlook for the fourth quarter is negative 2% to flat, the 2-year trend continues to build nicely. The strength at K&G in the prior year was clearance driven, thus a more profitable profile is expected this year.
Moores was a standout this quarter, generating an 8.6% same-store sales growth rate on top of a prior period 5.6% rate, and our initial plan for the quarter of a flat to 1% positive comp. We expanded our promotional cadence in the third quarter versus the prior year quarter and our customers responded. Our profitability from that change was also significant and was a key contributor to the overall group profit results. The pace of our 2-year comp sales rate for the fourth quarter is being tempered from the recent third quarter pace due to the anticipated promotional activity surrounding the holiday period in Canada.
We've been very active as it concerns other key parts of our business. Concerning our corporate apparel operations, we are largely complete with the integration of the acquisition of Dimensions and Alexandra, which we believe will be completed in the first quarter of 2012. This integration included significant reductions in the workforce, closing duplicative distribution centers and moving distribution to a centralized location. We've also integrated many back office functions. We anticipate seeing the benefit of these consolidation moves in 2012 and forward.
We are on budget for the year and have proposals out to a significant number of new customers, and also have uniform rebranding opportunities to existing customers. Dimensions and Alexandra continue to be one of the more significant providers of workwear in the U.K. market, providing approximately 5 million individuals their workwear needs.
As I mentioned on our last call, the big and tall product categories are an area we are seeing both growth and future opportunity. Our results for the third quarter continue to support justification for pursuing this customer segment. Since our last earnings call, we've opened 3 freestanding big and tall test locations, as well as have increased our merchandise assortment in existing stores as we embarked on learning the most financially efficient approach to driving this business.
Revenue growth in our e-commerce channels increased 63% over the prior year and continues to represent great future potential. We've made many operational changes this past quarter that included a reorganization that more closely aligns our marketing and technology work groups. We believe such alignment will allow us to realize continued strong and incremental growth in this important sales channel. More details around strategic plans will be discussed when we outline our plans for fiscal 2012.
An additional area of current growth and future opportunity is the more modern fitting clothing. These looks mostly target a younger customer, however, we're starting to see growing acceptance among middle-aged customers. A modern fit is cut closer to the body in tailored clothing, dress shirts and sportswear. Other characteristics include narrower lapels on suits and sport coats and narrower ties. We have these products in both private label and designer brands, which currently represents about 15% of our core business.
Men typically make tailored clothing purchases when their garments show excessive wear or their size needs change. When we see an emerging fashion trend as we do now, there becomes a third driver to the replenishment cycle. I believe our merchandising, marketing and selling experience provides us a unique opportunity to exploit this trend. We will be increasing our inventory and marketing investments in modern clothing in the coming months.
That covers the key items I wanted to mention, and I will now turn the call over to Neill.
Neill P. Davis
Thanks, Doug, and good afternoon, everyone. I will begin with an overview of the third quarter actual results, highlight our fourth quarter outlook and turn the call to George Zimmer before opening the call to your questions.
Earlier today, we reported total sales increase of 6.3% in the quarter. Our retail segment increased 5.9%, and our corporate apparel segment increased 9.5%. As Doug mentioned, included in these totals is an increase of 63.4% in our e-commerce sales during the quarter.
In order to provide you some color on business trends, you should know that we are able to monitor customer behaviors based on the fact that the overwhelming majority of our customers at our core brand, Men's Wearhouse, are members of our customer loyalty program called Perfect Fit. What we are seeing is that our advertising, coupled with our promotional posture, is resulting in an increase in the number of customers coming into our stores. What is even more encouraging is that when we look at the average transaction per customer, we are seeing that the average unit retail price is up and being accepted by our customers. Furthermore, we note that our sales force efforts in assisting customers, coupled with our promotional activity, is resulting in an increase in the average number of units sold per transaction.
The growth rate of 9.5% within our corporate apparel business includes an additional week of business in this year's quarter versus last year, as we completed our acquisition of Dimensions and Alexandra on August 6, 2010, one week into the fiscal third quarter last year. We realized a 3.4% growth rate on a comparable 13-week basis.
Before turning your attention to our outlook for the fourth quarter, I want to take you through a few more details of our operating margin and cash flow results of the quarter. Our retail merchandise margins increased 376 basis points. This is a significant improvement of the previous and prior year quarters. The pickup is related to a number of factors, which include the anniversary of our elevated promotional stance in the third quarter of last year, increases in average unit retail prices, significantly lower levels of product cost charge-offs and markdowns at our K&G stores, which is reflective of adjusted merchandising strategies initiated beginning of this year. In addition, we experienced continued leverage of fixed occupancy costs in the quarter of 69 basis points.
I should also mention that actual gross margin results were better than we had planned for at the beginning of the quarter due to stronger sales results realized during our non-promotional store-wide events throughout the quarter. Rounding out our retail segment results is a comp sales increase in our domestic tuxedo rental business of 1.9% versus a planned flat to 1% growth rate. In addition, we realized a higher tuxedo rental gross margin of 164 basis points as a percentage of related sales, due primarily to lower per unit rental cost.
Gross margins from our corporate apparel segment in the quarter were 29.4%, which compares with 26.5% in the prior year, due mainly to an increased mix of higher-margin United Kingdom customers, partially offset by higher product cost in our domestic business conducted by Twin Hill.
Adjusted selling, general and administrative expenses in absolute dollars increased 6.4% over the prior year quarter. Adjusted SG&A related to the corporate apparel segment resulted in a 1.7% increase. The remaining 4.7% increase is primarily due to increased payroll-related costs and variable costs associated with increased sales in the retail segment.
From a balance sheet perspective, total inventories increased 21.1%, primarily to support increased retail sales and planned promotions in the fourth quarter, as well as replenish comparatively oversold levels in the prior year as we embarked on a more aggressive promotional cadence. The company repurchased 500,000 shares at an average cost of $29.98 per share in the quarter and ended the quarter with cash and cash equivalents of $138.5 million.
That concludes my summary comments on the third quarter. I will now turn to our fourth quarter and updated fiscal year financial outlook. In our press release, the fourth quarter and full year EPS guidance is provided on both a GAAP and adjusted basis. My comments to you today will be to our adjusted current year expected results and adjusted prior year actuals.
First, I would like to call out that some of our planned and budgeted expenses that were to be incurred in the third quarter have been shifted into the fourth quarter due to timing differences, as well as unplanned severance cost to be incurred in the fourth quarter related to reorganizations within our technology work groups that Doug touched on earlier. We thought it worthy of highlighting these items, which will increase the fourth quarter loss by $0.02 against our previous guidance for Q4. That said, we expect the fourth quarter adjusted loss per share in the range of $0.12 to $0.15, which represents a significant improvement of the prior year quarter loss of $0.19.
The key drivers of the quarter include the continuation of improvements in comparable store sales and our retail apparel lines of business, driven by our merchandising strategies similar to that deployed in the fourth quarter last year, albeit at a more aggressive pace than in the prior year period. Retail segment sales are being planned for an increase of 5% to 6%. We are expecting an 8% decrease in sales in our corporate apparel segment in the quarter, which is primarily due to several significant new program rollouts that occurred in the prior year quarter, in both United States and United Kingdom that are not being repeated this year.
As it concerns our tuxedo rental business, our outlook for the fourth quarter calls for a 14% to 15% increase in our U.S. comps, and as Doug has mentioned, including our actual results of November, we have 94% of this forecasted quarterly volume completed and/or under reservation. From a gross margin perspective, we expect improvements year-over-year, albeit at a lower rate of improvement than that realized in the most recent quarter due to a more aggressive pace of promotions when compared to the prior year quarter, and a reduced level of margin benefit realized in the most recent quarter from lower inventory markdowns at our K&G stores.
We expect a modest deleverage of approximately 30 to 50 basis points in adjusted operating expenses in the fourth quarter. However, this deleverage is solely driven by a 30% increase in annual incentive compensation over the prior year, as approximately 50% of our annual incentive compensation expense is realized in the fourth quarter.
Our updated outlook for the fiscal year calls for an adjusted diluted earnings per share in the range of $2.28 to $2.31. This is an increase from previous guidance for the year of $2.13 to $2.20. This new outlook also represents a 55% to 57% increase over adjusted diluted earnings per share for fiscal 2010 of $1.47.
That concludes my prepared financial remarks. And I will now turn the call to George Zimmer.
George A. Zimmer
Thank you, gentlemen. Given the extremely challenging macroeconomic conditions that have existed throughout the year, I'm gratified by the outstanding results that we've been able to achieve. I would also like to note that our primary competitors have also reported impressive results.
Having observed the ebb and flow of the tailored clothing market the last 38 years, I speculate that the results are in part due to the interest in suits evidenced by millennials. If I am correct, then we are once again entering a golden age for purveyors of tailored clothing. I have patiently waited for this time to arrive and I'm grateful that the youngest generation become of age, understands that dressing up feels good and looks good.
We'll take your questions now.
Question-and-Answer Session
Operator
[Operator Instructions] And 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 tuxedo side. I think you guys have made some cautious comments about, I guess, the bridal spend or what that consumer was thinking on the last conference call. And just wondering given the numbers that you guys are guiding for Q4 in tux rentals, do you guys have a little more positive view today? And also, obviously, the brand that you -- you're not going to tell us, but does that -- should that give us more confidence that you can grow your tuxedo rental business better than low single digits next year? And then, the second question regarding -- Neill, your comments on the shoulder periods, I'm just trying to think through how does the tone of the quarter shake out for you guys? I think you're up against that really tough BOGO Free last year from Labor Day. So what's happening against the BOGO 100%, BOGO Free, BOGO 50%? I mean, what are you seeing around those events in the shoulder periods?
Douglas S. Ewert
Thank you, Brian. As far as our tuxedo business, we have -- as we said earlier, we have tremendous visibility into the balance of the year. There was some dislocation in the third period because of the phenomenon of 11/11/11 weddings. But as we've worked our way through that, we feel very good about our tuxedo business. We certainly feel great about our market position and our dominance and our ability to continue to grow this year. We're not prepared to describe what we anticipate the increase to be next year, but we remain optimistic that we're going to be able to continue to grow our share of this business.
Neill P. Davis
And Brian, this is Neill. As it relates to how our promotional activity has behaved and performed during the shoulder periods, I would suggest to you that the results that we have realized, when we were in a BOGO environment, when compared to a prior year BOGO environment and looking at it on a 2-year basis, we're pleased with the results that we're seeing. And as I made specific comment to, in my prepared remarks, the shoulder periods were much stronger than what we had anticipated. Sometimes -- in our forward looking of our business, we seem to feel like the business would be more pronounced and actually we're on that full BOGO handle, but we're finding that our customers are responding in a meaningful way during the times when we're not. So it's the best of all worlds when we're on sale. And as to the tone of the business throughout the quarter, September and October were better-than-planned results, and particularly October. So that's the profile I'd give to you for quarter business.
Operator
And our next question comes from the line of John Kernan with Cowen and Company.
Jerry Gray
This is Jerry on for John. I just wanted to ask you, you said with some more aggressive promotions to be expected into Q4, just if maybe you could give us some color on the direction of AUR going forward?
Neill P. Davis
As it relates to the fourth quarter AUR, we still expect AUR to be up year-over-year in the fourth quarter as that's what our guidance is calling for and it's one of the key drivers to our margin results. As I've also said, the tone in the fourth quarter certainly won't be as strong as the third quarter was, largely as we're anniversary-ing the inventory cleansing and clearances activity at K&G. As you think about the business going forward, our customers are clearly responding to the value and our average net selling prices are up. And we believe that, that's got some continuity to it as we move into next year, particularly if you reflect on Doug's comments about the fashion driver to the business. It's now beginning to get a little more consistent traction in the business.
Jerry Gray
Okay, great. Just a follow-up, I was wondering if you could maybe give some color on the BOGO strategy and maybe if you would ever consider increasing that cadence?
Douglas S. Ewert
Well, for competitive reasons, we're not prepared to talk about what our future plans are. But as Neill said a moment ago, we're pleased with how BOGO is performing and we're pleased with how it's performing compared to how it performed last year, but we will continue to adjust to the market conditions.
Operator
And our next question comes from the line of Janet Kloppenburg from JJK Research.
Janet Kloppenburg
I had a couple of questions. First, Neill, did you say that the Canadian performance had to do with incremental advertising versus last year?
Neill P. Davis
The Canadian business performed better not because of advertising, but because we were in promotion more days during the quarter this year than we were last year. But I would also observe for you that as we went through the quarter, we saw, I guess, strong legs to that promotional cadence that initially, might thought -- in other words, we might have pulled forward a little bit within the quarter. We didn't see that happen. The Canadian market is responding very positively to what they're seeing in our stores. So we're encouraged.
Janet Kloppenburg
Could the fourth quarter benefit from the same factors?
Neill P. Davis
Well, as Doug mentioned, it could, but as we get into the fourth quarter and the typical seasonal promotional activity, the rest of the retail industry, we're being appropriately cautious in that regard. So -- but I think we've got a good overall dynamic occurring in the Canadian market with our concept.
Janet Kloppenburg
And Doug, I know you talked a little bit about big and tall being -- having a good performance, but just a couple of questions there. In the past I think the comp trend there has been meaningfully higher versus the rest of the business, the other categories. I'm wondering if that trend continues and I'm also wondering if the 3 stores, the stand-alone stores, were successful enough to perhaps offer an opportunity to open more big and tall stores -- stand-alone big and tall stores next year?
Douglas S. Ewert
Janet, the big and tall business continues to contribute disproportionately to our results. The comp in big and tall continues to exceed that regular size product. The big opportunity for us to continue to grow this business is going to be within the 4 walls of our 3 retail concepts. We are testing 3 freestanding big and tall stores, part of that test is going to be measuring how much of the business that those 3 stores do comes out of surrounding Men's Wearhouse stores. So it's too soon to say what role freestanding big and tall stores are going to play in our long-term strategy. But I can guarantee you that an aggressive big and tall position in our existing four-wall basis and in our marketing going forward is a part of that growth strategy.
Operator
And our next question comes from the line of David Mann with Johnson Rice.
David M. Mann - Johnson Rice & Company, L.L.C., Research Division
My question is -- relates to the cost increases in product and raw materials that you're seeing. Can you just talk a little bit about what you're seeing for next year? And also, it sounds like you're -- you've been able to take price on most of the product. Can you talk about any categories where you've seen resistance to price increases?
Douglas S. Ewert
Sure, David. We continue to see, obviously, the same raw material costing phenomenons that others are reporting. Cotton has peaked and started to come down. Wool seems be somewhat stabilized. We anticipate wool staying high well into next year, and as we've talked about on previous calls, we have secured enough raw wool to support half of our total wool needs for next year as a hedge against these increasing raw costs. We do own that wool at considerably lower prices than current spot rates. And as far as our retail price increase strategies, our strategy has always been to offer the best value to the customer while staying below that of our competitors on like-for-like goods. So we have taken some retail price increases in all 3 of our retail concepts. Our prices remain below our competition, and we have seen no blowback from the customer from those price increases.
David M. Mann - Johnson Rice & Company, L.L.C., Research Division
Can you just update in terms of a private label penetration, have you needed to increase that to offset any of the price issues?
Douglas S. Ewert
Yes, a part of our strategy over the last 18 months has been to offset some of that cost increase by playing with the shift between private label and branded goods. I would tell you that Men's Wearhouse is now somewhere in the neighborhood of 50% private label, 50% branded, that was up from 40% branded, 60% private label, 1 year to 18 months ago. So that shift has predominantly happened. Doesn't mean that shifts won't continue in the future, but we're certainly pleased with the way we've been able to absorb the cost increases and pass on what we can to our customers.
Operator
[Operator Instructions] And our next question is from the line of Betty Chen with Wedbush Securities.
Alex Pham - Wedbush Securities Inc., Research Division
It's Alex Pham in for Betty. I just wanted to know if you guys could provide any additional color on potential maybe product extensions and for the e-commerce business, and maybe how the e-commerce business is trending as of to date?
Douglas S. Ewert
I would tell you that our -- as we reported, our e-commerce business continues to grow nicely. We still think that there is considerable growth opportunity in front of us. We're particularly, we think, underpenetrated in e-commerce sales in relation to brick-and-mortar sales. We do carry a number of things on our website that aren't available in our stores, but I would tell you that the best-selling items online are the best-selling items in store, that our customers are enjoying shopping with us in more than one channel, but the best-selling items remain constant across both platforms.
Operator
And our next question comes from the line of Richard Jaffe with Stifel, Nicolaus.
Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division
I guess a follow on, the inventory mix has changed, and you just mentioned, to more private label. I'm wondering what you've learned about being more promotional, having a more aggressive promotional cadence in terms of both brands and private label and how you see that unfolding over the next year in terms of both the mix, private label brands and the quantity or the inventory per store?
Douglas S. Ewert
Well, our inventories are up fairly considerably at the moment, that was by design. We were fairly oversold 1 year ago at this point. So we purposely stocked up so that we could move through the promotional fourth quarter with a much better inventory position that we had 1 year ago, and we believe that, that will pay off for us. We don't see making large changes in the private label versus branded mix. And those decisions really aren't made so much on the macro level, they're made on the item-by-item, vendor-by-vendor level. But the big opportunities in merchandising are to continue to grow the big and tall business and to maximize this fashion trend that we're seeing, this general acceptance of modern fit apparel. We believe that we are well positioned to take advantage of that. We have always had a strong designer brand presence in our stores. I believe that we effectively attract the younger customer because of the brands that we carry and because of the tuxedo rental business that drives millions of younger customers into our stores. And with this modern fit fashion trend unfolding in front of us, we think that, that's going to bring tremendous amount of opportunity for more growth.
Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division
Could you comment on your success in converting that tuxedo renter into a Men's Wearhouse tailored clothing customer?
Douglas S. Ewert
Yes. We continue to measure what percent of our new retail customers had a previous tuxedo rental experience with us and that number goes up quarter-after-quarter. So we're continuing to grow the number of customers that have their initial experience with us in a tuxedo rental transaction and now come back at a later date for a retail transaction. And I think when we look at some of the younger products and how well we're doing with them, I think that's just further evidence that the younger millennial generation is responding nicely to our products.
Operator
And we have a follow-up question from the line of Brian Tunick with JPMorgan.
Brian J. Tunick - JP Morgan Chase & Co, Research Division
Yes, so first one, I guess, can we get some kind of update on sort of that strategy of closing the underperforming after-hours, I guess, mall-based stores and driving those customers into the MW existing stores? I think you talked about occupancy opportunities. So when we try to frame, I think, you've said a return to 9% to 10% corporate operating margins for MW. How much is that still happening? And then, Neill, you were in the market buying back stock in the $29 range. What's the appetite of buyback versus dividend and sort of your minimum cash position as you head into the next couple of years?
George A. Zimmer
Hey, Brian. Let me -- on the tuxedo piece since I've been traveling around the country visiting lots of our new tuxedo stores. What we're doing is not just closing tuxedo rental stores and shifting 65% to 75% of the business to the nearest Men's Wearhouse. We also are finding that there are tuxedo rental stores that do extremely well, and we're able to expand the footprint. And we are calling those mini Men's Wearhouses because they are 4,500 square feet and capable of doing at least $1.5 million and that looks like it's working.
Neill P. Davis
Brian, this is Neill. And to round out George's comment, specific to your question, we will close approximately 34 legacy of the legacy tuxedo stores that were subject to acquisition many years ago, such that we will end the year with 354. So we're getting close to an optimal level of footprint in that line of business. Secondarily, to your question in terms of our share repurchase activity, the dollar amount and share count that I mentioned that we purchased in the third quarter was the same number I mentioned when we released our second quarter numbers. That was done in August. If you look back and reflect on the results we released today, you'll note that we had about $138 million in cash on the balance sheet. Our general target range for liquidity is in $150 million range at end of fiscal year. So there are some seasonality in working capital, timing differences, but we're pretty close to where we need to be relative to that liquidity number. And that is the barometer that we tend to think about in terms of our share repurchase activity. As it concerns cash dividend payments, those matters are taken up on a regular basis by the Board of Directors in January of each year, which they will do so this coming January.
Operator
And we have a follow-up question from the line of Janet Kloppenburg from JJK Research.
Janet Kloppenburg
I had a couple more questions. The new licensing agreement on the tuxedo side, could that be incremental to fourth quarter? And do the gross margin characteristics of that agreement correspond to your current gross margin in that business or could it be higher or lower? And also, I was wondering about year-end inventory. I know it's been beefed up because you were so depleted last year, and I was just wondering if you could tell me how you think it'll be at the end of the year end? Lastly, is there a way to measure the degree to which you're attracting a younger customer, it seems to me to be an advantage in your strategy vis-a-vis others in the industry? And maybe if you could talk to us a little bit more about your strategy for gaining market share with this customer going forward.
Douglas S. Ewert
All right. Let me take a shot at this, Janet. The new licensing agreement that you're going to hear more about in another -- in the next couple of weeks will not be available until next spring. So it won't have any impact on the fourth quarter. I can't tell you though that it is going to be a premium product, a nicer product than anything currently available on the marketplace, and we'll have a premium price tag with it. So it should be margin enhancing. As far as the inventory goes, I will tell you that we are planning to end this year with more inventory that we owned last year on an aggregate basis and on an average per store basis, but those inventory levels will be lower than historical highs a couple of years ago. As far as attracting the younger demographic, there's a number of initiatives underway. To do so, we have considerable resources targeting online initiatives, both social media and throughout the digital space, mobile applications, texting. It's certainly -- it's a multi-pronged approach, not just aimed at the millennials, but certainly they're going to be in the center of the target of those efforts, along with ongoing merchandising initiatives to make sure that we stay relevant, not only to the baby boomer generation, but the millennials. And that is an ongoing week-in, week-out process. I think I tried to cover most of what you suggested there.
Operator
And we have a follow-up question from the line of David Mann with Johnson Rice.
David M. Mann - Johnson Rice & Company, L.L.C., Research Division
Yes, my question is about the K&G operating margin recovery. I guess, with the success of what you're doing with your BOGO twos and the merchandise margin improvement that you've had this last quarter, what's the profitability outlook for K&G in '11? And what is the longer-term potential now?
Douglas S. Ewert
We believe that K&G is going to return in the not-too-distant future to acceptable middle single digit operating margins, higher single digit operating margins are going to probably require more store expansion, which we're not prepared to announce at this time.
David M. Mann - Johnson Rice & Company, L.L.C., Research Division
And then, in terms of what's going on with Syms and Filene's Basement, do you anticipate that, that will have any kind of perhaps positive impact in the business as those stores close?
Douglas S. Ewert
Well, to the degree that there's a finite amount of market share out there and that there's now a competitor that's going to be leaving the landscape that, that should give us further opportunity to expand our share, of course, after they go through their liquidation event through the fourth quarter.
David M. Mann - Johnson Rice & Company, L.L.C., Research Division
And then, in terms of sales or any kind of trend in November, can you just give some comment on anything in terms of the tone of business, especially Black Friday and Cyber Monday for you?
Douglas S. Ewert
We were pleased with our November results, not only in retail with our ability to comp our promotional activity from last year, but our strong tuxedo business with the 11/11/11 calendar shift and the outlook that we have for the balance of the fourth quarter. So without assigning specific numbers to it, we were very pleased.
Operator
And at this time, there are no further questions in the queue. I'd like to turn the conference back over to management for closing comments.
Douglas S. Ewert
Okay. We'd like to thank you for your interest in our company and wish everybody a very Merry Christmas.
Operator
Ladies and gentleman, this does conclude our conference for today. If you would like to listen to a replay of today's conference, you may do so by dialing (303) 590-3030 and entering the access code of 4488091#. We thank you for your participation. And at this time, you may now disconnect.
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