Tailored Brands' (TLRD) CEO Doug Ewert on Q1 2016 Results - Earnings Call Transcript

| About: Tailored Brands, (TLRD)

Tailored Brands, Inc. (NYSE:TLRD)

Q1 2016 Earnings Conference Call

June 9, 2016 9:00 a.m. ET

Executives

Ken Dennard - Dennard Lascar Associates

Doug Ewert - CEO

Jon Kimmins - CFO

Analysts

Tiffany Kanaga - Deutsche Bank

Eddy Plank - Jefferies

David Mann - Johnson Rice

Richard Jaffe - Stifel

Chad Sutherland - Goldman Sachs

Janet Kloppenburg - JJK Research

Bill Baldwin - Baldwin Anthony Securities

William Reuter - Bank of America Merrill Lynch

Carla Casella - JPMorgan

Karru Martinson - Jefferies

Betty Chen - Mizuho Securities

Operator

Greetings, and welcome to the Tailored Brands First Quarter Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions]

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Ken Dennard. Thank you, Mr. Dennard, you may begin.

Ken Dennard

Good morning and thank you for joining us today for Tailored Brands' conference call to discuss fiscal 2016 first quarter results. There will be a webcast replay of today's call on the company's Investor Relations Web site at ir.tailoredbrands.com. Additionally, a recorded telephonic replay will be available until June 16, and the information for accessing this replay feature is in the press release we distributed yesterday afternoon.

Please note that information on this call speaks only as of today, June 9, 2016, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.

In addition, certain comments made during the conference call today may contain forward-looking statements within the meaning of the United States Federal Securities Laws. These forward-looking statements reflect the current views of management. However, various risks, 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 and quarterly reports on Forms 10-Q to understand these risks, uncertainties, and contingencies, and you can access all those reports for free on the Tailored Brands' Investor Relations Web site.

Throughout this conference call, management will be discussing results on an adjusted basis, and the reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures, and our explanation of why the non-GAAP financial measures maybe useful are discussed in yesterday's earnings release.

Now, with me today are Doug Ewert, CEO; and Jon Kimmins, CFO. And I'd now like to turn the call over to Doug.

Doug Ewert

Good morning and thank you for participating in today’s conference call. Regarding today’s agenda, I’ll start by giving you my perspectives on our Q1 performance and discuss the work underway to strengthen and grow Tailored Brands. I’ll then turn the call over to Jon Kimmins, our CFO, who will provide a deeper dive on the financials. I’ll then make a few closing comments and open the call up for your questions.

Let me start with my high-level impressions of our first quarter. As you all know, it was a tough first quarter for most apparel retailers, and I view our performance as mixed. While our top line was slightly below our internal expectations, we did a good job managing our costs. Our selling margins and expenses were a bit better than we expected, which allowed us to report first quarter adjusted earnings of $0.29 a share, which was in line with our plan.

As we said on our March call, we think it is reasonable for investors to assume earnings will be more back-loaded than they were in 2015. Based on what we know today, including improvements we’ve seen in May, we remain on track to be within the adjusted earnings range previously given of $1.55 to $1.85 per share for the year.

Let me now give you a bit more detail. Regarding our sales results, I think it’s important to note that we were up against difficult comparable sales in our Men’s Wearhouse, Joseph Bank, and K&G businesses. Nevertheless, sales at Men’s Wearhouse, Moores, and K&G were below our expectations, while the decline at Joseph Bank was less negative than we had expected.

Regarding Men’s Wearhouse, business slowed during the quarter as comp sales declined 3.5%, which was below our internal plan. This was largely offset by a 200 basis point improvement in selling margin. As I mentioned, we were not immune from the weak retail traffic and consumer spending environment during the quarter, which was especially difficult in the apparel sector.

I’ll also note that we lapped a particularly strong comparable increase of 6.8% last year, which included a weak rental comp. As we analyze our trends relative to other retailers, we think the majority of our weakness was industry-specific.

Additionally, I would note that we believe the overall sales trend at Men’s Wearhouse may be improving as we make adjustments to our marketing strategies and lap easier comps. Comp retail sales were up by a mid single-digit rate in May. As we’ve previously shared, we view custom apparel as an important way to grow our business through personalization. By leveraging the Tailored Brands’ global supply chain, including the quick-turn capabilities of our domestic Tailored clothing factory, we’re offering compelling options that are differentiated in the marketplace with quality, value, and speed.

Last year, we introduced Joseph Abboud custom clothing in all Men’s Wearhouse and Moores stores. With suit prices starting at $795, we’re hundreds of dollars less than similar quality suits in the marketplace. This year, we expanded our offerings to include Joseph Abboud custom non-iron dress shirts for $125, and a new collection of custom tailored clothing under the Joe by Joseph Abboud brand, with suits starting at $395.

We’re encouraged by the initial response from customers to our expanded custom offerings. To give you some context, last year, total custom clothing sales were approximately $12 million, and we’re now tracking over $1 million per week. We expect this will continue to grow as we raise awareness, expand our offerings, and introduce custom apparel at Joseph Bank later this year. I will note however, that revenue from custom clothing is recognized upon garment delivery, which creates a lag affect on sales. The lag from custom dragged comp sales approximately 1% during the first quarter.

Regarding Joseph Bank, we continue to execute on the realignment plan we outlined for you in our March call. We continue to right-size the business on healthy and sustainable sales, rationalize the promotional model, optimize the assortment, and leverage our data analytics capabilities. Comp sales during the quarter were down 16%, which, as I mentioned, was a bit less negative than we forecasted. Declines in store traffic were partially offset by an increase in average ticket, fueled mostly by higher units per transaction. We continue to make progress fine-tuning the promotional model. Higher per-unit retail prices coupled with synergies from lower input costs lifted selling margin over 400 basis points in our full-line stores.

We’re encouraged by our customer reaction to updates to the assortment, and improvements we’re making to the shopping experience. We see particular strength in updated fits, big and tall sizes, the 1905 collection, denim, shoes, dress shirts, and formal wear rental. Similar to our Men’s Wearhouse business, our Joseph Bank business has sequentially improved in May. To be clear, we believe that the volatility and significant sales declines that we’ve seen since changing the promotional model will be with us through the third quarter, though the declines may not be as deep as we saw in November and December, our results are still very volatile, and we maintain a cautious outlook.

Let me now touch on our rental sales. Overall consolidated rental sales were down slightly during the first quarter. However with our visibility into forward reservations, we anticipate we will achieve a low single-digit increase for the year. This is similar to the cadence we saw last year as customers were booking their rentals closer to their event date. Our rental business is an important part of our portfolio, contributing approximately $450 million in annual sales across all channels. As we’ve discussed in the past, we’re redesigning our go-to-market strategy to better serve our customers. Specifically, we expect to open 300 rental shops in top Macy’s stores under The Tuxedo Shop at Macy’s brand. We plan to open 172 shops this year, and the balance in 2017.

In addition, as we announced last quarter, we intend to close approximately 100 mall-based Men’s Wearhouse Tuxedo stores this fall, and expect to transfer the majority of that revenue to nearby locations. The rental business at Joseph Bank continues to strengthen as we’re now in our second wedding season. Finally, furthering our efforts to increase the integration between physical and digital stores, we’ll begin introducing online rental services later this summer. Regarding our other businesses, K&G ended the quarter with a slight positive comp. Here again, we lapped a particularly strong 7.3% comp increase last year. The Moores business continues to face macro headwinds, and comp sales declined 3.9%. This was largely offset by a 200 basis point improvement in selling margin.

Our business in Western Canada is particularly challenged by the economic impact from the energy sector. However, similar to Men’s Wearhouse, the expanded custom business is being well-received by our customers in Canada. The Corporate Apparel business increased 2.9% during the first quarter, and in May we began shipping the new American Airlines program. Over the next few months, we’ll rollout new uniforms to 70,000 American Airlines employees. As we told you last quarter, we expect overall Corporate Apparel EBIT to be up roughly $10 million for the year from this and other initiatives.

Regarding operating income, as I mentioned earlier, in spite of what was slightly below expectation top line, solid performance on the cost side enabled us to generate operating income and earnings per share that were consistent with our plan. Our adjusted operating income declined by $20.4 million or 30% in the quarter, with $18.2 million of the decline coming from the retail segment. From a high level, our non-Joseph Bank adjusted operating income was flat relative to the year-ago quarter, despite sales that declined by $20 million. This was driven by the 200 basis point improvement in selling at Men’s Wearhouse and Moores. Joseph Bank adjusted operating income declined by $18 million versus the year-ago quarter. Again, Jon will be providing more detail on the Joseph Bank business performance as we’re being as transparent as possible during this period of transition.

As we discussed with you last quarter, we view 2016 as a transitional year for Tailored Brands. Our primary focus is on stabilizing, resizing, and rebuilding the foundation of Joseph Bank, from which we can profitably grown on a go-forward basis. We know that in order to be the leader in men’s apparel, we need to do more than fix the business and establish operational excellence. We need to be out ahead of the changing market dynamics and unprecedented lifestyle shifts that are occurring. That is why we were simultaneously announcing an era of innovation. We’re actively engaged in a comprehensive effort to strengthen our company to better serve our customers and shareholders in the future.

Through this process, which we call "Tailored for Growth," we’re aligning our company to optimize strategic focus, increase our agility, lower our costs, and to grow. For example, men’s clothing is anticipated to be one of the fastest growing online segments in the next five years. So over the next few months we will advance our Omni channel capabilities by launching online rentals, opening a new direct-to-consumer fulfillment center, and improving the online experience with new Web sites for both Men’s Wearhouse and Joseph Bank. By leveraging rigorous testing and data sciences across the Tailored Brands’ platform, we’re not only improving our efficiency and lower our costs, we’re also unlocking growth opportunities.

This year, we’ll not only close approximately 250 stores and realize $50 million in current year cost savings, which we expect to grow to 85 million next year. We are also introducing new service and product offerings in our various brands to attract new customers, like, expanded custom clothing offerings and a new collection targeting Millennials shoppers. We continue to analyze our business and anticipate even further savings opportunities beyond 2016, while at the same time exercising our muscle to innovate for growth.

I will not turn the call over to Jon.

Jon Kimmins

Thank you. Good morning everyone. I'll be covering the financial results for the first quarter, then I will provide some additional updates on store closures and expense reductions, and then I will discuss guidance for 2016, which we reaffirmed in last night's earnings release.

Before I start with the results, I'd like to make sure everyone knows that I'll be discussing adjusted numbers today, which eliminates certain costs that are reflective of the company's ongoing operations. The press release that we issued last night has GAAP results and reconciliation between GAAP and adjusted results. Also, our full GAAP results are covered in the 10-Q that we filed this morning. Both the press release and the 10-Q are available on our IR Web site at ir.tailoredbrands.com.

Now, let me get into the first quarter results. Our sales for the quarter were 828.8 million, compared to 885.1 million in the prior year, a decline of 6.4%. Our revenue decline of 56.3 million was driven by 37.6 million in Joseph Bank sales, a $14.7 million decline at Men's Wearhouse, a $4.3 million decline at Moores, and a $1.2 million decline at K&G. These decreases were partially offset by an increase in Corporate Apparel of 1.8 million.

Before giving you the comparable sales percentages, I want to remind investors that we are not including sales from our Joseph Bank factory stores. Since the Joseph Bank factory stores are running clearance sales, in preparation for closing, any positive comps from these sales would distort your ability to monitor the underlying performance of the full line stores. This impact in Q1 would have been relatively small at about 0.2%, but the impact could be much higher -- or much more significant in Q2 and Q3.

So, our retail comp sales for Q1 were as follows: Men's Wearhouse was down 3.5%, due to lower traffic, partially offset by higher AURs; Men's Wearhouse is also impacted by the negative 4.8% comp in rental revenue; Joseph Bank was down 16%, also driven by lower traffic, with an offset in higher UPTs and stronger rental revenue; Moores was down 3.9% from lower traffic, offset by higher AURs similar to Men's Wearhouse; and K&G was positive 0.2%, driven by a slight increase in UPT, offset by lower traffic.

Moving to gross margin, the total company had a slight decrease of 22 basis points in gross margin before occupancy. We saw slight increases in the gross margin rates from Men's Wearhouse, and Moores, and Corporate Apparel. K&G was flat, and Joseph Bank was below last year.

As Doug mentioned, selling margins at Joseph Bank full line stores increased by more than 400 basis points through lower cost and lower markdowns. In addition, the selling margin at Men's Wearhouse and Moores increased by about 200 basis points. However, these strong improvements in selling margins were negatively impacted by a de-leveraging of procurement and distribution costs.

Occupancy costs were below last year by 2.7 million as we have begun our previously announced store closures. This benefit will become more meaningful later in the year as our store closure program gains traction.

In advertising, we spent 2.7 million less this quarter, due to timing. Despite the favorable variance, we saw this expense de-lever slightly due to the steep sales decline at Joseph Bank.

Other SG&A declined by 7.5 million. While we had certain cost increases related to employee benefits and to Macy tux shop payroll, we more than offset them with ongoing realization of merger synergies as well as some early-stage cost reductions from this year's targeted $50 million in cost savings from our cost reduction program. We realized approximately $4 million in Q1 of the 50 million in savings expected in 2016.

As to synergies, it has been over two years since we initiated the myriad work streams that produced $100 million in cost synergies. We have tracked these efforts and reported to them clearly as we could. You will recall that we exited 2015 with a run rate of 75 million of merger synergies, and we committed to be at a run rate of 100 million by the end of this year. At this point, we're fully confident that all of those original initiatives have been or will be completed by the end of this year, but isolating their impact, amidst all the other business activity is becoming less clear and less useful. So we will stop reporting on merger synergies and focus more attention to current initiatives.

Back at just adjusted operating earnings of 47.5 million, which is 20.4 million or 30% below the prior year. I will provide you more details of the Joseph Bank quarter in a minute, but the key components of our operating profit decline are as follows: Our retail segment operating income fell 18.2 million, this was comprised of 80.1 million decline from Joseph Bank and flattish year-over-year operating income from our other retail businesses; Corporate Apparel income increased by 0.7 million, and shared service expenses increased by 3 million.

As to shared services, after completing the work on our new segment structure, we now estimate that the total shared service expense in 2016 will be approximately 175 million. This is above the range that we had estimated in our last call.

Back to Q1, our quarterly interest expense remains the same at about $26.5 million. Our adjusted tax rate for the quarter was 33.7. So, our adjusted EPS for the quarter was $0.29.

Our balance sheet remains strong, as well as our liquidity. We ended the quarter with $36 million in cash and no draw against our revolving credit line. So we still have full liquidity backup from the $500 million revolver. During the quarter, we made our scheduled $1.8 million payment on our term loan, and in early May, we paid another 35.5 million. So, as of now, our long-term debt is approximately 1 billion 620 million. The company has approximately $5 million in remaining scheduled payments in fiscal 2016. Just to remind investors, our term loan matures in June of 2021, the bonds mature in July of 2022, and the revolving credit facility matures in June 2019.

Inventory remained higher than last year by about 90 million, which was the same position we were in at the end of Q4. As described in March, the majority of the increase in inventory relates to Joseph Bank basic inventory, which built up late last year due to the weak sales. Our merchants began cancelling new orders for these basic goods back in Q3, so that by the end of this year, we expect to sell-through the carryover goods and get inventories back in line. As we've said before, we do not expect any write-downs related to the Joseph Bank inventory. Inventory was also elevated in Corporate Apparel due to the appending rollout of the American Airlines Uniform program. These goods will be shipped over the next two quarters.

Now I would like to provide a brief update on our profit improvement project starting with store closures. We still expect to close approximately 250 stores before the end of the fiscal year. While the exact details of these closings are still subject to ongoing negotiations with landlords, I'll remind of our original plans. We expect to close 80 to 90 full-line Joseph Bank stores mostly in January of 2017, but certain of these stores have earlier lease expirations. We have closed nine of these stores so far. We will exit the factory outlet business, which consists of 58 stores, and two of these stores have already been closed. And we plan to close 100 to 110 MW tux stores by October; seven of these stores have been closed so far this year.

So, landlord negotiations are proceeding, and at this point we believe we will spend approximately $50 million to exit leases. This is at the high-end of the range we estimated in our last call. Now, as to our targeted cost reductions, we are still on track to save $50 million this year, and as Doug said, we expect these cost reductions to annualize at about $85 million for next year.

Before I move on to guidance, we want to update you further on Joseph Bank. As discussed in our last call, we will be providing summary operating results for Joseph Bank, while it's undergoing its transition. For the first quarter, Joseph Bank sales were 178 million versus 216 million last year. Gross margin before occupancy was 99 million versus 122 million last year. Occupancy costs were 36 million this year versus 38 million last year. SG&A were 64 million this year versus 68 million last year, and this resulted in an operating loss in the first quarter of this year of $2 million versus operating income of 16 million in the first quarter of last year. This is $18 million swing in earnings, which is slightly better than our plan. To remind you, our plan was for a full year decrease in Joseph Bank operating earnings of about $60 million.

Moving on to guidance, as stated in our release and reiterated by Doug this morning, we are reaffirming our 2016 adjusted EPS guidance range of $1.55 to $1.85. While our Men's Wearhouse business fell short of expectations in Q1, we are seeing a nice rebound, which leads us to reaffirm our comp guidance of low single-digit growth. Our Joseph Bank business was a little better than planned in Q1, but the ongoing volatility of that business leads us to maintain our outlook for a mid-teens decline in comp sales. So again, we remain comfortable with the EPS range that we've given, and we hope to tighten this range after we see the next three months of business.

Before I turn it back to Doug, I would like to confirm a few more guidance metrics for 2016. We expect the adjusted tax rate for 2016 to be about 35%. We expect to spend approximately 120 million in capital expenditures, including construction of an addition to our Houston distribution facility and the build-out of the Macy tux shops. In addition, the CapEx, we expect to spend approximately $60 million in cash cost to exit stores and to realize certain expense savings. This is at the high-end of the range we provided in March.

We said in March that we expected significant cash flow from reductions in working capital. We achieved a significant amount of this in Q1, and we expect more later at this year when we work through Joseph Bank and Corporate Apparel inventory. And we plan to repay approximately $5 million more on our term loan, bringing this year's total to about $42 million in debt repayment.

Now, one more comment on EPS guidance. While we don’t provide quarterly EPS guidance, we are sensitive to the fact that as we transition our Joseph Bank business and while Tailored Brands goes through an organizational realignment and cost reduction program, there are a large number of moving pieces, which makes forecasting our quarterly results more complex than usual. We therefore thought it would be useful to again point out that this year's cadence of earnings is likely to be more back-loaded than 2015.

There are several reasons for this. First, our cost reduction plan will continue to gain traction as the year progresses, and provide a bigger benefit to second half results. Approximately 75% of the cost reduction benefits will be realized in the second half of this year. Second, our store closures are primarily slated for the third and fourth quarters of this year, and again the benefits of closing these less profitable stores will be in the second half of the year. Lastly, we believe that Joseph Bank business will improve in the back half as our realignment plans begin to gain traction and when we anniversary the elimination of BOGO 3.

So, as Doug said earlier, we think it's reasonable for investors to assume that earnings will be more back-loaded than they were in 2015. For illustrative purposes, the midpoint of our 2016 EPS guidance range suggest that our adjusted EPS would decline by $0.10, relative to the adjusted $1.80 we reported in 2015. Q1 adjusted results were down by $0.25. Q2 is also likely to be below last year, but by a lesser amount than the $0.25 decline of Q1. And we expect both the third and fourth quarters of 2016 to show improvement when compared to 2015.

So, thank you again for your time this morning, and let me now turn the call back to Doug for a few closing remarks.

Doug Ewert

Thank you, Jon. So again, during this transitional year, we are focused on stabilizing, resizing, and rebuilding the Joseph Bank business. Additionally, we are actively engaged in a comprehensive effort to optimize strategic focus, increase our agility and efficiency, lower costs, and innovate for growth across the entire portfolio.

Looking to the future as Tailored Brands, we’re guided by our mission to provide a personal, convenient, one-of-a-kind shopping experience with compelling products, and world-class service. I’m excited about our future, and look forward to sharing our progress with you along this journey, as we change the way men shop.

I’ll now turn the call over to the operator for your questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Paul Trussell with Deutsche Bank. Please proceed with your question.

Tiffany Kanaga

Hi, this is Tiffany Kanaga on for Paul. Thanks for taking our questions. As you improve the offering and lower the promotional levels at Joseph A. Bank, are you seeing any cannibalization between that brand and Men’s Wearhouse. And if so, how are you addressing it?

Doug Ewert

Good morning, Tiffany. Our best visibility into crossover between the two brands is by overlaying the customer data files. We have robust customer loyalty programs in both concepts. And so overlaying those customer loyalty files just to remind you back during the -- at the initial point of the merger, we saw about 7% customer overlap. And every quarter we take another look at that, and we continue to see those numbers at about that same level. We are not seeing any increase in the amount of business from customers who shop both concepts. So we are not seeing as best as we can track any increase in cannibalization.

Tiffany Kanaga

Thanks. And I also wanted to ask, how big do you think custom apparel can get as a percentage of total sales, and how do the margins compare versus the rest of your offerings?

Doug Ewert

I think it’s too early to start throwing a number out there, but based on how quickly this is growing, this is going to become one of our bigger initiatives, and one of our most fast-growing initiatives. The metrics on the business are pretty attractive. It attracts an incremental customer that we aren’t normally getting much of the time. It also helps exiting customers trade up into higher price points, so we get much better transaction metrics from the custom transaction. And the margins are as good as any exclusive apparel that we source ourselves.

Tiffany Kanaga

All right, thank you so much.

Doug Ewert

You’re welcome.

Operator

Our next question comes from the line of Eddy Plank with Jefferies. Please proceed with your question.

Eddy Plank

Hi, good morning guys. Thanks for all the additional color, that’s very, very helpful. I guess just looking at the Joseph Bank business. How should we think about clothing margins over the balance of the year? Really nice improvement over the last two quarters, it starts to toughen in the second quarter. And then as it relates to occupancy there, the store closures obviously help. Should we expect to see meaningful decreases in occupancy in the back-half? And could operating income turn positive then? And then I have a quick follow-up, thanks.

Doug Ewert

I’ll take the selling margin question. We’re seeing lists in the selling margin at Joseph Bank from two components. First of all, the mergers cost synergies, and the higher AURs from a less aggressive mark-down cadence. We think that the margins are going to continue to grow at Joseph Bank beyond the third quarter of this year, because merger cost synergies are going to continue to flow through the business. So I don’t think I’m going to guide you to a longer-term number, but we’re certainly pleased with the 400 to 500 basis points that we’re seeing now. The margins are quickly getting very close to what Men’s Wearhouse selling margins are. And over time, we believe that the Joseph Bank selling margins can be higher than those at Men’s Wearhouse.

Jon Kimmins

And Eddy, as to occupancy, the stores are really closing pretty late in the year so we won’t have a meaningful impact to occupancy this year. The real benefit will be next year when all the stores are closed. And as to the operating earnings for Joseph Bank, we had called out that they would drop by about $60 million. Right now we’re doing a little better than that, but we still believe that Joseph Bank will have an operating loss this year.

Eddy Plank

Okay, thanks helpful. Thanks for the clarity. And then just real quick, I know it’s early in this rollout, but any early reads on the business at Macy’s?

Doug Ewert

The early reads are -- the results are immaterial. With the marketing cycle to the bride, we need to be communicating with her many months in advance of the event. And so, first year results are not strong at all, it’ll really be the second year where we can start to gain traction on those marketing efforts. So stay tuned.

Eddy Plank

Got it, thanks for that. Okay, all the best guys.

Doug Ewert

Thank you.

Operator

Our next question comes from the line of David Mann from Johnson Rice. Please proceed with your question.

David Mann

Yes, good morning. And thanks again for a lot of the detail. In terms of the Men’s Wearhouse business, can you talk a little bit about what you’ve done thus far in Q2 to help turn around that comp decline and volatility you saw in Q1? And then secondly, in terms of the Men’s Wearhouse selling margin, can you talk about the drivers of that improvement and the sustainability of those gains as we look forward? Thank you.

Doug Ewert

You bet, David. We saw business improve in May in Men’s Wearhouse, Joseph Bank, and in Canada Moores sequentially. We did make some adjustments in late-April to our pricing and promotion strategies at Men’s Wearhouse and Moores. And believe that that has contributed to the improvement that we’ve seen in those two businesses. As far as selling margins, the primary driver to the selling margin improvement that we’re seeing in those businesses is coming from merger cost synergies, and we expect those to continue.

David Mann

And then as a follow-up, in terms of the tux business at Men’s Wearhouse, the decline in the first quarter was I think one of the bigger declines we’ve seen in the recent past. Well, can you just talk a little more about what gives you comfort that you’re going to be able to see a rebound as the rest of the year goes along? Thank you.

Doug Ewert

Yes. Well, at this point now we’re in June, so we’re in the thick of the wedding season. And with the forward-visibility on the business we can see about two-thirds of the total business that we expect to get for the year. And so relative to last year, we’re comfortable that we’re going to end the year positive on a consolidated basis from the rental perspective in the low single digits, as we had guided last quarter. What we’re seeing inside the business is that customers are booking closer to event. So we’re seeing a little bit later response to the marketing efforts. And we’re continuing to see movement towards retail, big improvements in an initiative this spring to sell prom suits.

It was one of our best-selling items, is a prom package we put out there this year. So we’re continuing to see some shifting around -- between rental and retail. And that doesn’t scare us. The margin dollars are actually more attractive on a retail purchase than a rental transaction. So we’re happy to get the business either way.

David Mann

And in terms with the tux timing, would that suggest that we’re already seeing a nice increase in the second quarter in terms of what you’re seeing in tux rental?

Doug Ewert

Well, without putting numbers around it, I think it’s safe to say that Q2 and Q3 are the biggest tux quarters of the year. And our anticipation of running an increase on the whole year would imply that Q2 and Q3 are going to be good.

David Mann

Great, thank you very much.

Doug Ewert

Thank you.

Operator

Our next question comes from the line of Richard Jaffe with Stifel. Please proceed with your question.

Richard Jaffe

Thanks very much guys. And just a follow-up on Men’s Wearhouse and Joseph Banks, the margin improvement, and the way you’re getting there, if you could talk about some of the successes at both businesses from both a product and a marketing standpoint that’d be great. Thank you.

Doug Ewert

Well, the formula is similar at both concepts. We are doing a better job in sourcing products or getting lower costs without sacrificing quality of product across the enterprise. We are also trading up our business with better qualities. Obviously the Joseph Abboud store has been fairly well-publicized at Men’s Wearhouse and Moores, and that business continues to grow. And it’s exclusive product sourced ourselves, we can control the entire supply chain, and it’s very margin-rich. And we’re seeing traction with that at Joseph Bank as well. Some of the newer products that we’ve brought in are premium quality, and little premium price point, customers responding well. So we’re trading up average ticket, higher margin dollars, and it’s obviously all exclusive products.

Richard Jaffe

And the marketing side of it, on the commercial cadence?

Doug Ewert

Well, we’re continuing to emphasize [ph] those strategies. We have some new campaigns on air for this spring that we’re pretty pleased with. And have some new campaigns that are going to be launching later this year. And so marketing is an ongoing evolution and we’re pleased with the progress we’re making there.

Richard Jaffe

And the marketing spend and that the venues now, primarily television, but those brands will be what we should look for?

Doug Ewert

I’m sorry, it was a little muffled. What was the question?

Richard Jaffe

I’m sorry. The marketing will be on television primarily for both brands, and if the dollars spent will be more or less equivalent to year-over-year?

Doug Ewert

Well, we market in all channels. So our digital spend is up significantly year-over-year. And it shifts out of broadcast direct marketing –- I’m sorry, direct mail is an important lever in the Joseph Bank business. So it’s not just a broadcast story, but our overall marketing spend for the year, we anticipate will be similar to last year. We are having to pay for some higher marketing rates because of the election year, so all of that is baked into our forecast. But we are guiding shareholders to think of marketing spend as very similar to what we spent last year overall.

Richard Jaffe

Great, thank you very much.

Operator

Our next question comes from the line of Betty Chen with Mizuho Securities. Please proceed with your question.

Unidentified Analyst

Hi there, it’s Alex on for Betty. I was just wondering if there’s any metrics that you could share in regards to the Macy’s Tux stores, what’s the average square footage, and how should we think about sales and margin contribution versus the Men’s Wearhouse and Tux stores? And then I was just wondering if, in regards to the store closure plans, have you guys quantified the potential benefit of sales transfer to closer stores or the ecommerce channel?

Doug Ewert

Yes, Alex, the average size of the tux shop at Macy’s is about 500 square feet. It is a -- our deal with Macy’s is a percentage of sales. And as we close the former MW Tux stores, which is obviously a fixed cost structure, it moves into a variable cost structure as we transfer that business to Macy’s. We can’t control where that business transfers. And we view the business agnostically to channel. We don’t try to push the customer from one channel to the next. So we’re happy to get the business whether they choose to come to Joseph Bank or Men’s Wearhouse or Macy’s. So it’s a little hard for us to predict exactly where that business is going to migrate. We view the business in totality, but we’re going to get a more attractive expense structure with transitioning out of those fixed costs in the malls, into the very low costs at Macy’s.

Operator

Our next question comes from the line of Taposh Bari with Goldman Sachs. Please proceed with your question.

Chad Sutherland

Good morning, it’s Chad on for Taposh. I wanted to follow up on Joseph A. Bank UPTs. I thought it was interesting that they’re up despite the fact that you’re lapping these volume-driven promotions. So is there any additional color you can provide there?

Doug Ewert

Yes, Chad. We were pretty excited about that actually. We’ve done a fair amount of talking over the last year-and-a-half about our ability to improve the customer experience with selling behaviors and a more powerful incentive compensation program. And we believe that those efforts are starting to bear fruit, and we see that in the UPT. So you’re right, as we lap these large multiple transaction events from the previous year, to be able to grow UPTs significantly is I think a meaningful metric.

Chad Sutherland

Got it. And then I wanted to ask kind of a longer-term question on the tux business. Last year, when trends got choppy you talked about some of the trade you’re seeing from renting tuxes to buying suits, and different trends like that. How are you thinking about that beyond the context of 2016 in terms of tux rentals in the future then?

Doug Ewert

Well, we see -- first of all, rental is a holistic business, it includes suits. Suits is a fast-growing portion of the rental business. And so for those customers looking for that occasion, and not needing to invest in a suit, rental is an attractive option. But the wedding trends are changing fairly dramatically as there are more casual weddings, there are more destination weddings. There were fewer formal weddings, and the overall wedding rate is growing slowly. So we just want to be the event destination for our customers regardless of whether they want to go full rental to a retail transaction. And we’ll adjust our business over time to respond to what our customers want.

Chad Sutherland

Great, thank you.

Doug Ewert

Thank you.

Operator

Our next question comes from the line of Janet Kloppenburg with JJK Research. Please proceed with your question.

Janet Kloppenburg

Good morning everyone. Jon, I was wondering just on a technical question how we reconcile the 400 business point improvement at Joseph A. Banks, because on the last page of your release you give us that gross margin for Jos banks, and somehow I’m not getting that improvement. So there must be something else in there that I’m not recognizing. So I’d like to learn more about that.

And then Doug, I was wondering if you could just talk a little bit more about the improved trends in the core businesses here in the second quarter. Do you think that relates to -- I know what you said about the promotional strategy, but could there be anything else going on that’s influencing that? Maybe what’s going on with the legacy outlet store closings, or anything else that might be impacting that? The selling margin improving in the core business, I know you said that had to deal with synergistic benefits. Is that just greater volume buying and the AUC opportunity or is there more there? Thank you.

Jon Kimmins

Janet, I’ll take the first part about the Joseph A. Bank gross margin. What we do for the gross margin calculation in our financials is we include procurement and distribution costs. And those costs are not as variable as the basic landed costs of the product. So, think of them as a little bit more fixed. And when your top line is declining rapidly, like it is at Joseph Bank, you’re de-levering those costs. We think that the selling margin, which is really the most basic margin, it’s the selling price minus the landed cost, think of it that way, really is more -- we talk about it because it’s reflective of what we’re doing in terms of reducing the cost of the product, and reducing the discounts on the product, in other words, getting a higher price on it. So we talk about both, but the reconciliation between the two is just the fact that the selling margin, up over 400 is being offset by de-levering the other procurement distribution costs.

Janet Kloppenburg

So they must run pretty high then, right, because there is [indiscernible].

Jon Kimmins

That’s right. They do right now, as the sales are dropping. They can be adjusted over time, but they can’t be adjusted in the short-term.

Janet Kloppenburg

Okay, thank you, Jon.

Doug Ewert

And Janet, I would add that a lot of our efficiency efforts will work to -- in the P&D area, like for example, regional distribution, which starts this year, will help bring those costs down. It’s just those are longer-term initiatives, a little less flexible there. And then you had a lot in your question, so I may not get it all, so you’ll have to correct me where I miss it…

Janet Kloppenburg

I’ll help you.

Doug Ewert

I would say, in addition to some of the adjustments that we’ve made in the pricing and promotion strategies in the second quarter, we’re also continuing to see nice improvement in the Joseph Abboud brand business as in total, nice increases in that business across the enterprise. I would also point out the nice increases that we’re seeing in the custom business, which did drag Q1 comps by 1% because of the lag affect on the revenue recognition. And as that business continues to build, that’s helping our business as well. And then a lot of the other initiatives that we’ve talked about over the last year or so, the new launch of the Kenneth Cole awareness program is continuing to grow. So there’s lots of exciting growth initiatives underway that are delivering some nice results.

Janet Kloppenburg

And then I just asked about the selling margin, up 200 basis points and legacy synergies are driving that, but is that simply just lower costs from the vendors because they’re the bigger pencil?

Doug Ewert

Yes, it’s mostly cost synergies from the bigger pencil with not only our third-party vendors, but our factories, where we source directly in mills. And then also improvements in how we go to market, and how we promote, and being a little less promotional are helping.

Janet Kloppenburg

And that should continue through the year, Doug?

Doug Ewert

Yes, we anticipate these merger cost synergies to continue to flow through the businesses.

Janet Kloppenburg

Thanks so much, and good luck.

Doug Ewert

Thank you.

Operator

Our next question comes from the line of Bill Baldwin with Baldwin Anthony Securities. Please proceed with your question.

Bill Baldwin

Thank you, and good morning Doug and Jon. Doug, could you just offer a little bit of color on your previous statement, where you indicated you thought Joseph Bank’s margins would eventually be higher than Men’s Wearhouse? Kind of give us a little color on why you believe that?

Doug Ewert

Yes. Well, first of all, I’m talking about the retail side of the business. I think rental will always be much bigger at Men’s Wearhouse than Joseph Bank, and that certainly improves the margins of the enterprise at Men’s Wearhouse. But on the retail side of the business, by picking up 400 to 500 basis points in margin here we’re quickly getting very close to Men’s Wearhouse maintain sale margins. I believe over time, being a designer brand with completely vertical sourcing will yield higher margins. And as we can improve the mix over time and get higher average unit retails on the product, I think long-term, the Joseph Bank brand has the opportunity to become our most margin-rich brand. And I would just point out that in our legacy businesses, which are more house-of-brand concepts, we buy a portion of our inventory from third-party suppliers, which is not as margin-rich. Whereas at Joseph Bank, the only product in that store that is sourced through a third party are some branded shoes.

Bill Baldwin

And you plan to keep it that way in going forward to keep it a design brand, like it is right now?

Doug Ewert

That’s our intention.

Bill Baldwin

Yes. Are there much differences, Doug, in the demographic between the Men’s Wearhouse customer and the Joseph Bank customer? In terms of age, in terms of income, this type of thing?

Doug Ewert

Yes, the Joseph Bank customer is generally older than the Men’s Wearhouse customer, and they have a higher average household income. The average age of a Joseph Bank customer is about 55, with an average household income in excess of $100,000 a year. At Men’s Wearhouse the average age is more in the mid-40s, and coming down. And the average household income is in the $75,000 ballpark.

Bill Baldwin

Thank you very much.

Doug Ewert

Thank you.

Operator

Our next question comes from the line of William Reuter with Bank of America Merrill Lynch. Please proceed with your question.

William Reuter

Good morning. My question refers to kind of a couple that have been asked so far. I guess have you guys finalized at this point what the promotional strategy in terms of buy-one-get-three-free and buy-one-get-two, whatever you guys might be moving towards. And I guess, are you confident that at current volumes of these stores, the Joseph A. Bank stores that are going to stay open, given the de-leverage of distribution, can these kind of operate profitably going forward? So I guess there’s two parts to that.

Doug Ewert

Yes, we believe that the promotional strategies that we’re using at Joseph Bank right now are sustainable, and can grow year-over-year. We believe that we can continue to leverage down the infrastructure cost, like through regional distribution and through centralized tailoring. And that we believe, as we rebuild this brand it can become a very powerful profit generator for our holding company.

William Reuter

Okay. And then, I guess, a follow-up from me. You guys talked about an incremental $35 million of savings for next year. I guess do you know what areas those are in? Do those include lower occupancy costs?

Doug Ewert

No, that $85 million has just been annualization of the $50 million that we get this year. And none of that $50 million is coming from the reduction in occupancy, that’s a separate savings.

William Reuter

Great, thank you very much.

Doug Ewert

Thank you.

Operator

Our next question comes from the line of Carla Casella with JPMorgan. Please proceed with your question.

Carla Casella

Hi, similar on that savings. I wanted to just clarify, it sounds like you’ve got $25 million more synergies from the remaining –- the prior program that should be realized this year and then 50 from this new. And in the past you had mentioned that will be offset by 10 million of additional -- of overhead cost from ACs that won't yet be absorbed, and 10 million in greater labor, is that still the case, or any of those numbers have changed?

Jon Kimmins

No. Carla, it's Jon. We haven't updated any of those numbers. So far we still believe those are the best estimates.

Carla Casella

Okay, great. And then, of the savings, is there a -- how much of that is coming from the Joe Bank -- Joseph Bank side? You mentioned some of the distribution costs, part of the cost savings, but have you -- how does that split for the overall program, or is it corporate-wide?

Doug Ewert

It's corporate-wide, and to get at this kind of money, there are dozens and dozens of work streams underway, and sources of cost savings, but the big waivers are in infrastructure. For example, when we acquired Joseph Bank, they did a large portion of their tailoring through centralized tailoring facilities. We're now beginning to leverage those with Men's Wearhouse, and dropping our tailoring expenses fairly dramatically. There is one source. So it's not really coming from Joseph Bank. It's coming as a result of the Joseph Bank merger, and it's benefiting the other businesses.

A lot of the cost savings are coming from essentially other people's money, as we're leveraging our size and scale, and renegotiating some contracts and some cost from third-party, and from goods not for resale, consolidating some of our purchasing activity there, getting better costing on products that we acquire, and then there has been labor savings as well. We have done a risk, and continue to optimize the central overhead.

Carla Casella

Okay, great. And then, American Airlines business, is that -- am I right, it's about 30 million to 50 million of top line if it's been given kind of profit estimates?

Doug Ewert

Yes, we didn’t give a top line number for that. We just indicated the impact -- the overall impact on our Corporate Apparel operating earnings this year would increase by about $10 million, but we didn’t give any other metrics.

Carla Casella

Okay, great. And then, on the -- just sequential, you have talked about May, I'm wondering if we look at last year, given the timing of promotions and kind of timing of events around tux, how do your comparisons stand for kind of the second quarter, was May or June or July a particularly weak or strong month last year?

Doug Ewert

Well, I can tell you that for example at Men's, last year, our second quarter comp was about 3%, so, considerably lower than the 6.8 that we saw in Q1 last year. At Joseph Bank, last year we were down 1% in the first quarter, we were down about 9% in the second quarter. K&G was up seven in both quarters last year, and Moores was up about one in both quarters last year.

Operator

Thank you. Our next question comes from the line of Karru Martinson with Jefferies. Please proceed with your question.

Karru Martinson

Good morning. Just a follow-up of Carla's question, so when we look at that May improvement, do you feel that it is that, you know, the comps are getting a little easier for you, or you're getting traction with these promotional shifts and perhaps some easing of these industry-specific headwinds you referenced?

Doug Ewert

We are -- like for example at Men's, we are lapping obviously in easier comp, but when you look at a two-year stack, it's an improvement on a two-year stack. So we think the business is getting better.

Karru Martinson

Okay. And when we look at the bonds, your split rated B2, CCC+, when you talk to the rating agencies, what's kind of the feedback they get in terms of how the runway here for the cost savings, are there any changes in terms of their outlook as they look at the companies?

Doug Ewert

We have a lot of conversations with the rating agencies. I wouldn’t want to try to characterize those on their behalf or how they are feeling, but they have all the information that you have, and I think their ratings are reflective of -- they are not particularly concerned about our liquidity near-term, but otherwise how they are feeling, I can't answer for them.

Karru Martinson

Okay. And if I could just sneak in one more; just in terms of the industry-specific headwinds that you kind of referenced, is it just that the male consumer has pulled back, or do you feel that there is a broader shift going on?

Doug Ewert

Well, I am not so sure that we can add much to the dialog on what's going on in retail, and what are the macro influences on what's happening in apparel right now. I can tell you that over the decades in our business when there has been economic anxiety, it has had an impact on our business, but I don’t think -- beyond that, I don’t think I can really add much to the ongoing dialog of the challenges that apparel retailers are facing.

Operator

Thank you. Our next question comes from the line of Betty Chen with Mizuho Securities. Please proceed with your question.

Betty Chen

Thank you. I was hoping maybe you can talk a little bit more about the profile of the custom clothing customer, whether they are new or existing, and whether they are sort of trading up from the private label business that you previously had, or more of your branded product, any color around that would be helpful, thanks.

Doug Ewert

Yes. Betty, I will talk about what we do know about the metrics in the Joseph Abboud custom business that we had last year. What we saw is about half of the customers that came to us to buy that product were new to file, and about half of the customers were existing customers that were trading up. The average price of a Joseph Abboud custom suit is about $775 or so, which is considerably higher than our average suit price, which is closer to about $300. When we look at the transactions of a Joseph Abboud custom transaction, it's considerably higher, four times higher than our average transaction, higher UPTs. The new program that we launched under the Joe by Joseph Abboud brand with the suit under $400, it's too soon for us to start commenting on what we see in that business. It's only been out there for few weeks, but we look forward to updating you as we go. But we anticipate that it's going to be an attractive offer to help us attract new customers to shop with us. It's a really compelling value to be able to offer a custom suit for under $400. That is an uncommon value. And to be able to do it on the scale with which we're doing it, I'm pretty excited about what that can do for us over the long-term, and then custom dress shirts, it's something that our customers have been asking for a while, and so we're excited to introduce it. We are getting a lot of positive feedback from our stores. And I would point out that the results that we are seeing this spring are happening with no marketing effort yet. Marketing will kick in later this year, but it's exciting to see what's happening right now. We are just organically within the business.

Betty Chen

That's great, Doug. I was also curious, just want to verify, I believe that you have called out the Jap [ph] inventory will be worked down through the balance of the year; I just wanted to see how you feel about the Men's Wearhouse inventory position after the Q1 results. It seems like there has been a pick up in May, but just wanted to make sure that you are also comfortable with the comp position at the Men's Wearhouse brand. Thanks.

Doug Ewert

I am. I am. The list that you are seeing in the Men's Wearhouse margin is just a -- I'm sorry; the inventory is just a point in time. We will end the year at Men's Wearhouse with less inventory per store than we had a year ago, and that lift is really being driven primarily by higher price point goods, by higher quality goods.

Betty Chen

Okay, great. Thank you so much, Doug, best of luck.

Doug Ewert

Thanks, Betty.

Operator

That concludes our question-and-answer session. I would now like to turn the call back over to management for closing comments.

Doug Ewert

Thank you very much for tuning in this morning. We look forward to updating you at the next quarter.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.

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