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The Men's Wearhouse (NYSE:MW)

Q4 2011 Earnings Call

March 07, 2012 5:00 pm ET

Executives

Ken Dennard - Founder and Managing Partner

George A. Zimmer - Executive Chairman and Co-Founder

Douglas S. Ewert - Chief Executive officer, President and Director

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

Analysts

David M. Mann - Johnson Rice & Company, L.L.C., Research Division

Janet Kloppenburg

John D. Kernan - Cowen and Company, LLC, Research Division

Unknown Analyst

Margaret B. Whitfield - Sterne Agee & Leach Inc., Research Division

Betty Y. Chen - Wedbush Securities Inc., Research Division

Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to The Men's Wearhouse Fourth Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Wednesday, March 7, 2012. I would now like to turn the conference over to Mr. Ken Dennard with DRG&L. Please go ahead, sir.

Ken Dennard

Thanks, Camille. Good afternoon, everyone, and welcome to Men's Wearhouse Fourth Quarter Fiscal 2011 Earnings Call. Today's call with management will cover a review of fourth quarter results and the outlook for the first quarter and full year of fiscal 2012 followed by a Q&A session. Please note, we will be making a number of forward-looking statements today and all such statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions mentioned today due to a variety of factors that affect the company, including the risks specified in the most recently filed Forms 10-Q and form 10-K. This call is copyrighted material of The Men's Wearhouse, cannot be rebroadcast without our express written consent.

And now I'd like to turn the call over to George Zimmer, Founder and Executive Chairman of the Board of Directors. George?

George A. Zimmer

Thanks, Ken. Before Doug and Neill get into the results and what drove them -- pardon me. Let me begin over. I'm sorry. Before Doug and Neill get into the results and what drove them, I'd like to take this opportunity, after a spectacular year, to step back and look at our company with a wide-angle lens. Of course, we're extremely pleased with our 2011 results.

From the very beginning, I believe that the foundation of The Men's Wearhouse must be built by applying the Golden Rule to the day-to-day interactions between the company and its employees, and in turn, our store-based people's interactions with their customers. I'm so proud and grateful when I see this culture of service manifesting in both the current results and in the employee satisfaction that has led The Men's Wearhouse to be voted 100 Best Companies to work for, for the 11th year. This culture is the part of business that is extremely hard to replicate and takes decades to build.

As I mentioned on the last call, I believe we are entering the Golden Age of the suit and our associates stand ready to serve our customers. This combination of a growing marketplace and a service culture that differentiates us from our competition is why I remain optimistic about this year and the coming years.

I'll now turn it over to Doug.

Douglas S. Ewert

Thanks, George. The 17,000 men and women in our company deployed a variety of strategies and leveraged their experience to deliver impressive results in 2011, a great year for all of our stakeholders, particularly our shareholders. While I couldn't be more pleased with our 2011 results, I'm equally enthusiastic and optimistic about our opportunities. Before turning your attention to our 2012 plans, I want to share some of the highlights that are not apparent in the numbers.

Among the most notable achievements of last year is the fact that we sold a record-breaking 3 million suits and rented a record 3 million tuxedos. During our annual suit drive, we collected a record 144,000 garments and partnered with over 200 nonprofit organizations who helped unemployed men trying to get back into the workforce. And for the 11th year, we were selected as one of the Top 100 companies to work for, earning our highest-ranking ever.

Looking towards 2012 and beyond, I would like to discuss the 5 most significant drivers to our organic growth. These are areas our executives are most focused on.

The first is big and tall. During 2011, we grew our big and tall business 14% to $369 million, representing 23% of our total retail apparel sales. Since these products historically produced approximately 300 basis points higher margin than standard sizes, big and tall represents a disproportionate margin contribution opportunity. Our tactics include continued refinement of our product offerings and multichannel marketing initiatives.

Last year, we opened 3 freestanding big and tall test stores to further our understanding of how this customer shops. Through these test stores, we see customers responding to an expanded array of products and sizes. We will now utilize this learning in our full-line retail stores and forego further expansion of big and tall stores.

The second opportunity is being driven by a silhouette change in men's dress apparel. Roughly once every 10 years, a replenishment cycle is driven by a silhouette change in men's suits. 20 years ago, the cycle was driven by wide-shouldered and double-breasted suits. 10 years later, the 3-button suit drove the replenishment cycle. Today, we're seeing a much trimmer shape drive replenishment. It can be described as modern fit and is influencing trimmer shirtings and neckwear as well. Though these trimmer looks are particularly attractive to a younger customer, influences are seen across all demographics and sizes in the form of narrower lapels and pleatless pants.

During 2011, modern fit products represented 19% of our apparel sales, growing 64% and generating $309 million in revenue. In 2012, we will shift more of our inventory into modern fit products and feature these looks in all of our marketing channels, including a new television campaign airing later this month.

We're focusing considerable resources towards maximizing this fashion cycle. We're positioned to benefit from this cycle more than most and we have high expectations.

Another organic growth opportunity is tuxedo rental. During 2011, our tuxedo rental business generated a record $377 million in revenue with comp sales growing 16% in the combined last 2 years alone. Earlier this year, we introduced the exclusive Black by Vera Wang Tuxedo. And consumer response has been extremely positive with early advanced reservations in Vera Wang exceeding our projections. We just launched a new tuxedo rental website. And in the coming weeks, we'll introduce 2 mobile phone apps. A wedding group manager will help brides and grooms manage their wedding party reservations. And a prom rep app will help high school kids recruit and track their prom referrals and give them an opportunity to win cash and prizes. These are just a few of the tuxedo marketing initiatives planned for this year. And 2012 is off to a great start with advanced reservations running close to 10% higher than a year ago.

As reported on previous calls, we've made and we'll continue to make investments in technologies intended to deepen our relationships and share of closet with our customers. During 2011, we grew our online business by 67% and saw close to a $100 million of revenue from e-mail and texting offers redeemed in-store. Last fall, we deployed technology that enables our sales force to more easily combine store inventory and online inventory into one transaction and thus, increased the average check, share of closet and improving the customer experience.

Our customer database now exceeds 10 million customers and our websites attract 1.5 million unique visitors a month. We are optimistic that further online initiatives, both in the works and on the drawing boards, will provide significant growth and strengthen our brand, as the authority for men's apparel.

The fifth area of focus is store growth. We know that only 62% of Americans and 65% of Canadians live within a 10-mile radius of one of our Men's Wearhouse or Moores stores. The four-wall profit profile of our Men's Wearhouse and Moores stores, which includes the disproportionate flow through from the tuxedo rental business has allowed us to successfully test smaller square footage stores in new markets. We now believe we can grow our full-line store count to 750 in the U.S. and 125 in Canada in the next several years. Further opportunity to rationalize more of The Men's Wearhouse tuxedo stores remains.

When we close an underperforming tux store, we've either opened a new full-line store or recaptured at least 65% of the revenue in existing stores. This profit improvement was particularly evident during the fourth quarter.

At K&G, our focus on rightsizing the business has resulted in significant improvement and a positive operating margin. Our customers are responding to our merchandise offerings and compelling multichannel marketing efforts. By leveraging technology, we were able to lower our average store inventory levels by 7% in 2011 with further planned inventory reductions in 2012. Additionally, we closed 3 underperforming stores and managed our overall cost structure down.

Looking forward, we will continue to focus on our core customers with deep value merchandise and targeted marketing messaging. We're pleased with the progress we're making at K&G and look forward to further store growth opportunities when we return to historical operating margin levels.

With respect to our U.K. corporate apparel operations, we've now completed the integration of Dimensions and Alexandra by consolidating our distribution facilities into one primary location and centralizing our sourcing, technology and accounting functions.

We are also integrating our IT systems and expect to have this completed by the end of this quarter. During 2011, we completed several large uniform rollouts for customers, including the Royal Mail, which was our largest rollout ever, and Lloyds Bank. We also began to seek price increases from our contract customers to cover cost increases in raw materials and manufacturing. Additionally, we continue to win some significant new accounts, including British Gas and Metropolitan Police.

We have a strong pipeline of contract customer opportunities that we are pursuing this year. And we will be focusing our marketing efforts for Alexandra on our direct channel, including a new e-commerce site later this year. We believe we have opportunities at both our U.K. brands to improve productivity and expand product offerings to existing customers as well as to leverage sourcing capabilities for our U.S. TwinHill uniform division and take further advantage of the expertise obtained in the acquisition of Dimensions and Alexandra.

According to industry sources, men's apparel is enjoying a positive trend overall. Our 5 #1 market share businesses, suits in the United States and Canada, tuxedo rental in the U.S. and Canada and corporate apparel in the U.K., are evidence that we have strong brands. And I believe we are focused on the right strategies.

The unquantifiable advantage is our people and the strength of our service culture that has been developed and nurtured for 39 years. I've spent recent weeks meeting with all of our store managers and senior leaders and their enthusiasm for our business is higher than I've ever seen.

We have strong positive momentum on our side and our outlook has never been more enthusiastic and optimistic.

I'll now turn the call over to Neill to review the numbers.

Neill P. Davis

Thanks, Doug, and good afternoon, everyone. Our total sales grew 13.3% for the year deployed by mid- to high-single-digit increases in comparable store sales within our retail segment, which represents an acceleration over prior year trends. Our operating margin on an adjusted basis increased 246 basis points to reach 8.03%.

As you have heard Doug discuss, we believe we have strategies in place to further increase our relative profitability over the near term to move closer to our historical peak double-digit operating margins. In addition, we generated over $160 million in operating cash flow supporting continued investments in upgrade and expanding our store base and infrastructure, as well as returning approximately $90 million to shareholders through dividends and share repurchases while maintaining a very strong, debt-free balance sheet.

Let's move to the specifics of the fourth quarter. Retail segment sales in the fourth quarter increased 6% of the prior year. And on the same-store basis, increased 9.3% at Men's Wearhouse, decreased 2.1% at K&G and decreased 0.2% at Moores. These results going into the quarter exceeded our expectations in Men's Wearhouse, met our expectations for K&G and were below expectations at Moores. All categories of business performed well during the quarter with the exception of our cold weather merchandise offerings.

From a regional perspective, all regions performed well in the U.S. and in Canada, particular strength was realized in the Western regions offsetting weaknesses across the main part of the country.

Average transaction values increased in the low-double digits at Men's Wearhouse, increased in the mid-single digits at K&G and increased in the low-single digits at Moores. This is the result of higher average unit retails and units sold per transaction at both Men's Wearhouse and K&G.

Moores average unit retail declined. However, it was offset by higher unit sold per transaction. The average number of transactions per store declined in the low to mid-single digits across all retail store brands.

Tuxedo rental revenues increased 13.3% and on a same-store sales basis, increased 14.9% in the United States, which was in line with our expectations.

Tux rentals for the quarter were, in part, driven by the unique wedding date of 11/11/11, which coincided with the Veterans Day holiday weekend. I would also point out that the improved productivity of our overall sales performance in tuxedo is driven by the closure of unprofitable and duplative tuxedo rental stores, many of which are mall-based as those leases expire.

Within our corporate apparel segment, sales declined 14.3% over the prior year quarter and were in line with our expectations. As we've discussed previously, the timing of the rollout of new uniform programs heavily influences the seasonality of business trends within corporate apparel customers.

In the fourth quarter of fiscal 2010, as you heard Doug talk, we completed 3 major rollouts in the U.K., 1 major rollout in the U.S., which were not replaced with new rollouts in the fourth quarter of 2011.

Excluding the effects of these prior period rollouts, recurring business trends increased in the low-single digits. Consolidated gross margin in the fourth quarter was 40%, an increase of 271 basis points from last year.

Our retail segment gross margin was 41.3%, an increase of 292 basis points over last year. This was also ahead of our plan for the quarter. The primary strength of margin improvement was driven by merchandise margins, favorable year-end adjustments and occupancy leverage. Retail inventories increased 23.2%, primarily to replenish what we believe to have been oversold levels in the prior year as we embarked on a more aggressive promotional cadence.

Our corporate apparel segment gross margins were negatively impacted by the write-off of unproductive catalog inventory supporting our U.S. business and the absence of higher-margin business in our U.K. operations due to the timing variances of new customer rollouts that I've just covered for you.

In the fourth quarter, adjusted SG&A in dollars was $230.5 million, a 5% increase over last year. This year-over-year increase was driven by higher incentive compensation cost as the company exceeded its stretched financial incentive goals for the year. Excluding these costs, adjusted SG&A increased 3.6% over last year, which was in line with our net sales increase of 3.7%.

As I mentioned at the beginning of my comments, cash flow continues to be very strong. During the year, operating activity has generated $163 million of cash, representing a 135% flow through of net earnings, capital expenditures were $92 million and were in line with our budget. Cash flow before financing activities was $71 million, which represented an increase of $58 million over the prior year.

Let's move now on to our financial guidance for 2012. First, with our fiscal year expectations, followed by the first quarter. For planning purposes, we are expecting a 4% to 5% increase in total sales. Our fiscal year will include an extra week in January 2013, which is adding approximately $30 million to annual sales. I will also make reference to the impact that, that extra week is having on gross margin, SG&A and diluted earnings per share of the balance of my guidance commentary to help you with comparable year-over-year evaluation.

Our same-store sales, which will be reported on a 52-week year basis, at Men's Wearhouse, we expect to increase 3% to 4%, K&G increasing 1% to 2% and Moores increasing 2% to 3%. We are expecting a 2% to 3% decrease in our corporate apparel segment, primarily due to a lower U.S. dollar to the pound sterling conversion rate and lower new customer rollouts. We are planning up to 25 new net -- net new stores for Men's Wearhouse, 3 new Moores stores and closing 3 K&G stores. In addition, we expect to close up to 43 Men's Wearhouse and tux stores as a result of lease expirations, which is a function of our strategy to maximize tuxedo rental sales productivity between our traditional Men's Warehouse stores and our smaller, primarily rental stores that had been previously operated by After Hours that we acquired in 2007.

We are assuming gross margin to increase 65 to 70 basis points driven by higher average unit retails, continued occupancy leverage and the extra week in the fiscal year is contributing approximately 5 basis points of that margin increase. On the SG&A front, in aggregate dollars, we expect an increase in the 4% to 4.5% range. However, excluding the impact of the extra week in January, that expense growth rate would be in the range of 2.5% to 3.5%. And by the way, this annual rate of increase will not be the case in every quarter. Specifically, we anticipate a much higher rate in the first quarter and significantly lower rate in the fourth quarter. I will come back to this comment into more detail when I cover the outlook for the first quarter.

On that basis then, we're assuming earnings per share on a diluted basis of $2.70 to $2.78 for fiscal 2012. The 53rd week in the fiscal year will add approximately $0.02 in earnings per share. So on our comparable 52-week year, we are expecting an increase of 13% to 16% over fiscal 2011's adjusted diluted earnings per share.

In terms of use of cash, we anticipate incremental working capital in the range of $10 million to $15 million and capital expenditures in the range of $100 million to $107 million. With our excess cash, we will support our quarterly cash dividend rate of $0.18 and we'll continue to buy back stock depending market conditions. We have approximately $82 million of buyback authorization remaining as of the end of February 2012.

Let's move to our outlook for the first quarter. We are expecting a total sales increase of 2% to 2.5%, which is based on an increase on our retail segment of 3% to 4% and a decrease of 15% to 16% at our corporate apparel business segment.

Our retail sales expectation is driven by same-store sales increases of 3% to 4% at Men's Wearhouse, 1% to 2% at K&G and 6% to 7% at Moores. Included in these comp increases is an expectation of a 9% to 10% increase in our domestic tuxedo rental business. These growth rates are on top of the prior year same-store sales increases of 10.8% at Men's Wearhouse, a 9.3% increase at K&G and a 6% increase at Moores. And concerning our domestic tuxedo rental business last year, a comp of 3.9%.

The strong growth rates in the prior year quarter are a reflection of our new promotional marketing efforts initiated in the latter part of fiscal 2010. I will also point out that the stronger pace of growth in our tuxedo rental business this year versus last year relates in part to the earlier Easter holiday, which will shift some of our prom season rentals from the second quarter to the first.

We're expecting sales at our corporate apparel segment to decrease 15% to 16% over the prior year quarter. This decline over the prior year is a function of the timing of new customer rollouts that we expect in fiscal 2012. The decline in the first quarter will be at a similar rate of decline in the second, but will be partially offset by gains in the second half of the year, that Doug elaborated on in his commentary.

Gross profit margins are expected to advance in the 90 to 100 basis points range in the quarter, substantially stronger than the prior year change. This improvement driven by gains and merchandise margins as we anniversary the changes in promotional strategies in our retail business. In addition, we anniversary the negative impact of the mix shift of our margin profile with the addition of the acquisition of Dimensions and Alexandra, as those businesses are lower gross margin businesses than our retail segment.

And lastly, the benefit of occupancy leverage, while still evident, will diminish due to the changes in the pace of sales growth that I just reviewed. While gross profit dollar growth is expected to surpass our total sales growth rates, our SG&A expense growth rate of 6% to 6.5% largely offsets that gross margin improvement. However, that deleverage is of a temporary nature.

This higher rate of expense growth in the quarter relates, as Doug highlighted in his remarks, to increased investments in payroll and infrastructure to support continued store growth, merchandising initiatives and further development of e-commerce that were put in place in the second half of last fiscal year.

In addition, this year, we are increasing our marketing spend in support of various online tuxedo rental and merchandising initiatives. The rate of SG&A growth will diminish to the low single-digit range in the second and third quarter stemming from the leveraging of the fixed cost expense of these incremental costs that I just mentioned. In addition, the realization of cost synergies from the integration of the Alexandra and Dimensions businesses in the United Kingdom in the prior year will have a positive impact, as well as lower incentive compensation costs as bonus thresholds are reset for the new year.

I would add that these lower incentive compensation costs, along with lower cost stemming from our ongoing rationalization of the previously acquired stores of After Hours, will favorably impact our fourth quarter as we are currently anticipating a flat to 1% increase in SG&A costs, which when combined with continued improvement in gross profit will return the company to profitability in the fourth quarter, the first time since fiscal 2007.

On net basis then, we are expecting our first quarter diluted earnings per share to be in the range of $0.53 to $0.54, a flat to 2% increase over the adjusted prior year quarter. This is on top of last year's adjusted diluted EPS increase of over 100%.

I want to conclude with affirming Doug's comment that we feel good about our prospects for 2012 and beyond. We have a very well recognized brand in the tailored clothing market, as well as the formal wear industry and believe we are on trend with good values for our customers, which gives us the confidence returning to a double-digit operating margin business in the near term.

That concludes our prepared financial remarks and we will now open the call to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of David Mann with Johnson Rice.

David M. Mann - Johnson Rice & Company, L.L.C., Research Division

Neill, can you talk a little bit in more detail on corporate apparel in terms of the operating margin that you achieved last year and what's the implied operating margin that you're looking to achieve this year in the guidance?

Neill P. Davis

David, I'll have to get back to you off line on that. I don't have those numbers off the top of my head at the moment. But I will say that our improvement in gross margin -- it should be an improvement in gross margin year-over-year, particularly as we anniversary some of the inventory cleanup in terms of our catalog business in the U.S., as well as you heard Doug mention that we're in the process of pushing through price increases as we can to catch up on the pressures we've been realizing in the supply chain. So there should be improvement year-over-year in the gross profit margins for that business.

David M. Mann - Johnson Rice & Company, L.L.C., Research Division

In terms of your inventory levels, obviously, you're investing some in there for some of these new merchandising initiatives. When should we expect the inventory levels to be -- the growth pace should be more in line with your sales growth. And perhaps secondly, can you talk a little bit about the unit increases in inventory in terms of what kind of price increases you're -- cost increases you're seeing to drive that up?

Douglas S. Ewert

Sure, David. As we talked about in the prepared remarks, our inventory levels are considerably higher than they were a year ago because of what we felt was an opportunity from the previous year of letting our inventories dip too low or basically, our sales greatly exceeded our expectations. We are comfortable with our inventory levels now. And you're going to see by the end of the year, our inventory levels will flatten out with the previous year. Tuxedo rental, though, we are planning to increase our inventory investment there just to support the higher revenue levels. As far as cost increases, we are seeing wool plateau. We don't anticipate wool going higher, but we are not yet seeing wool come down. We are -- as you may remember from previous calls, we are hedged to a large degree with our wool needs for this year and we are hedged at a price that is in the high-single digits below current spot prices. So that strategy seems to have worked well for us. We are seeing cotton start to come down a little bit, but not much.

Operator

And our next question is from the line of Janet Kloppenburg with JJK Research.

Janet Kloppenburg

Doug, if you could just clarify some issues for me. So you're increasing your marketing spend at The Men's Wearhouse for the first quarter. And I think you're introducing a new product line from Vera Wang as well. Yet, and I know you're up against a big promotional program from last year, but you'll be conducting that program as well. Is there anything else behind the 3% to 4% increase that what I would call a modest increase in your comp assumption there? And also on Moores, it looks like the reverse is happening. You had a disappointing fourth quarter and now you're looking for the business to have a significant boost in sales in the first quarter, which, it doesn't seem that reasonable to me. And then lastly, if you could address what's going on in the European business. I hear you that there's a lot of shifts in contracts, et cetera. So are the underlying trends there weaker than expected given what we all know is going on in Europe?

Douglas S. Ewert

Yes, Janet. The marketing spend is being planned up a little bit this year. We're planning a more aggressive promotional posture in all 3 of our retail chains. We also, as you pointed out, are introducing Vera Wang and have some considerable marketing effort behind that and our total tuxedo rental business. The Moores business is -- was most impacted by the unseasonably warm weather in the fourth quarter, more so than we experienced down here in the U.S. We don't think that that's an ongoing issue and that was just a fourth quarter issue for us. And then as far as the U.K., there is a number of things going on there. We had a number of large rollouts about a year ago that we are anniversary-ing. We believe that the underlying business is healthy. We're seeing a comp increase on the core business, once you sub out the rollout impact. And we are also still experiencing margin pressure there. As you know, we engage in long-term contracts with our customers. And with the cost increases that we've experienced, it takes a little longer to pass those on to the customers.

Operator

And our next question is from the line of John Kernan with Cowen.

John D. Kernan - Cowen and Company, LLC, Research Division

I just wanted to -- I wanted to get your outlook for selling prices in 2012. You guys are in a unique position of actually selling more units, at the same time you're increasing prices. How long do you think that path to increasing prices and what's embedded in your guidance for selling prices and I guess, AUR increases in 2012? Then I got a quick follow-up.

Douglas S. Ewert

Thanks, John. We aren't anticipating any other significant retail price increases because we aren't experiencing any other significant cost increases or any more cost increases at this point. And a lot of the retail price increases that we took last year happened somewhat in the middle part of the year. So we're going to lap that this year, but we aren't anticipating any other retail price increases. We are seeing some shifts in mix that are always going on, but not as a result of retail price increases.

John D. Kernan - Cowen and Company, LLC, Research Division

Okay. And then outlook for average unit costs in the back half, I may have missed this but what are we looking at in terms of percentage change of average unit cost in the back half of the year?

Douglas S. Ewert

I don't have an aggregate number for you. A lot of the cost increases that we've -- that you've been hearing about for a long time we didn't really start to feel until the latter half of last year. So we won't lap that until this coming fall.

Operator

And our next question is from the line of Jon Rich [ph] with JPMorgan.

Unknown Analyst

It's Jonathan on for Brian. I was wondering if you could talk about the cadence of the quarter as far as sales trends go and any commentary on how its trending quarter to date?

Douglas S. Ewert

Sure, Jonathan. Our results for February are right on plan and are baked into our forecast numbers.

Unknown Analyst

And those trends through Q4, cadence of the quarter?

Neill P. Davis

Jonathan, we don't give discrete outlook in the second, third and fourth quarters, just the first quarter ahead of us.

Unknown Analyst

I meant sales trends in Q4 that you just reported, like on the monthly cadence?

Neill P. Davis

The strongest were clearly November and December as that's the seasonal holiday periods and we were most active in our promotional marketing activities and those abated in January and, of course, weather issues laid on us in the back half of the quarter as well. So the strength was in the first 2 months.

Operator

And our next question is from the line of Margaret Whitfield with Sterne Agee.

Margaret B. Whitfield - Sterne Agee & Leach Inc., Research Division

I was curious about the modern fit line in terms of what marketing support you're planning and what kind of an increase you see. Will you be adding different categories to the modern fit? And a follow-up also would be as to why you decided not to continue with the separate standalone big and tall stores?

Douglas S. Ewert

Sure, Margaret. Well, modern fit, as we talked about a moment ago, is trending up very well, 64% just last year. Our strategy is to put inventory in front of sales on a fast-moving trend like this. I don't want to go out there with a number on what we think the penetration will be because it's a moving number. But we see a significant amount of opportunity there. We've devoted considerable marketing energy toward it. In our plans, we have the new television that will go on air later this month in both U.S. and Canada. We have web and e-mail initiatives. We have some digital changes we're making in our stores and store signage. And we see the impact of modern really across most of our categories. It's suits, it's pants, it's sport coats, it's dress shirts, it's neckwear and in many sportswear categories as well. So as we said earlier, we're pretty excited about this. As far as the separate big and tall stores, it was a test to see what the most optimal way was to maximize the big and tall opportunity. We're experiencing varying degrees of cannibalization, which was somewhat expected, out of the surrounding stores in each of the 3 markets that we have these stores in. Most notably, in New York, we -- because we are generally under stored in Manhattan, we weren't getting cannibalization and we were getting many requests from our customers to carry all of our sizes in that Manhattan big and tall store, so in fact, a few weeks ago that was converted to a full-line store. Houston and Dallas continue to operate as a separate big and tall store and we're getting some great learning out of those experiences. But we don't think the optimal way to maximize this is to open more freestanding stores, but rather leverage the learning through our other 1,100 stores.

Operator

And our next question is from the line of Betty Chen with Wedbush Securities.

Betty Y. Chen - Wedbush Securities Inc., Research Division

I was wondering, Doug or Neill, if you can address whether an early Easter has any impact on your customer base, whether at the core Men's Warehouse store or K&G or Moores. And then also for K&G, I was curious to hear, if the quarter-to-date trends are reflected in your guidance, which seem to be a sequential improvement versus Q4 and perhaps talk a little bit about what you may be seeing differently in that target client base. And then lastly, in terms of the tux stores, how many additional closures should we expect after this year? And with the seasonality in the tux business, Neill, that you alluded to in terms of earlier Easter affecting prom and then lapping last year's 11/11 wedding date, how should we think about the tux sales in Q2, Q3 and Q4? Any color would be really helpful.

Douglas S. Ewert

Thank you, Betty. Let me take a stab at a couple of these and then let Neill chime in. Early -- the timing of Easter most impacts, K&G's business, Easter is a very, very important holiday at K&G. And secondly, most impacts our tuxedo rental business because Easter influences when prom happens. So the movement of Easter doesn't necessarily impact the magnitude of the business. It just -- it impacts the timing of the businesses. And then as far as tux stores, we anticipate -- we don't know exactly how many more will be converted either into full-line stores or will close. We evaluate that on a store by store basis as each lease comes up for renewal or a kick-out opportunity appears. But we anticipate that over time, that the number of tuxedo stores will settle in around 250 as the full-line stores settle in around 750. That's at least what our current belief is for store count.

Neill P. Davis

And Betty, this is Neill. As it relates to the flow of our tuxedo rental business, second quarter somewhere in the low single-digit range. Third quarter, high single-digit. And in the fourth quarter, low single digits. And that's a domestic comp.

Betty Y. Chen - Wedbush Securities Inc., Research Division

And can Doug or Neill, could you talk a little bit about what you're seeing at the K&G customer base? As it seems like your Q1 guidance seems to show some strengthening in the spending power of that customer versus what you reported for Q4.

Douglas S. Ewert

Betty, that was primarily weather impact.

Operator

And our next question is from the line of Richard Jaffe with Stifel, Nicolaus.

Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division

A question on the modern fit, I'm wondering if you're going to try and brand that, either put a nationally-recognized brand behind the fit or to make it a standalone brand within the stores with a strong identity unto itself.

Douglas S. Ewert

Modern fit is a generic term that we use. Clothing manufacturers use a variety of different terms, they use trim, they use slim, they use fitted. We use the broader term, modern. And it's really throughout our store. It's everywhere from Calvin Klein to our private label programs. Our new Vera Wang tuxedo is the first tuxedo that we've offered that we're offering in both a standard fit and a slim fit. So it's really not just a one brand or one product line collection. It's really across the store. And I think this is going to grow to be a pretty significant part of our business that is really going to require a good, better, best assortment in a variety of price points and so it doesn't really fit with just one look.

Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division

Will it be differentiated within the store as a shop or through signage or a special hang tag?

Douglas S. Ewert

Well, there are a special hang tags on a lot of the products. And most of the modern fit is identified as such. It's our belief that when we operate specialty stores it really doesn't lend itself to pull out and have separate departments really within the store. It works best in our selling process to merchandise the stores the way we do and let our salespeople help guide our customers to the right fits.

Operator

And our next question is from the line of Dave Kernkraut [ph] with Berman Capital.

Unknown Analyst

I just have one question. You rely so much on television advertising and with this presidential election cycle going through, you see how much Romney's spending and filling, that Obama has accumulated $1 billion. What do you anticipate, the rest of this year, as we get into the fall season in terms of getting preempted, having that impact to your marketing program?

Douglas S. Ewert

Thanks, Dave. Well, this happens in every significant election year. The availability and the cost of media goes up and it becomes a little bit more difficult to book, but we have a pretty good visibility into our promotional plan, and our media buying team can work far enough in advance to secure the positions that we need and the impact on what our anticipated costs are are baked into our forecast.

Unknown Analyst

That's baked into the forecast at this point? Okay.

Operator

[Operator Instructions] Our next question is a follow-up from the line of John Kernan.

John D. Kernan - Cowen and Company, LLC, Research Division

Just one modeling -- quick modeling question. What is your outlook for dollar occupancy cost in 2012?

Neill P. Davis

One second, John, and we'll get an answer to your question. It should be [indiscernible] well, it's slightly down.

Operator

And our next question is from the line of Janet Kloppenburg.

Janet Kloppenburg

I was just wondering will your marketing budget be up every quarter or is this just a first quarter effect? And Doug, can you talk a little bit more about the investment you're making in this trimmer fit? In other words, will the SKU count be going up in that area? And what happened? I mean how do you include that? Is something being eliminated? Just a little bit about how you're investing in that category? Does it affect and benefit every quarter and the marketing budget for the whole year?

Douglas S. Ewert

Janet, we're not prepared to release what our marketing spend plan is by quarter. And then as far as modern goes, I would tell you that it's almost exclusively a shift within existing planned buys and inventory mix, it's not necessarily incremental inventory. It's just repositioning of inventory.

Janet Kloppenburg

In other words, some of the looser fits go out, some of the trimmer fits come in?

Douglas S. Ewert

That's correct.

Janet Kloppenburg

Okay. And I was also just wondering about if you had any thoughts on the international front for your men's tailored clothing businesses. I know you're working in the U.K. with the corporate apparel business, but a lot of companies in the arena now are talking about going internationally. And I'm wondering if you could share any thoughts you might have there.

Douglas S. Ewert

We don't currently have any plans other than our business in Canada.

Operator

Our next question is a follow-up from the line of David Mann.

David M. Mann - Johnson Rice & Company, L.L.C., Research Division

Similar to that last question about inventory. On the big and tall, can you -- is there in your stores is there really that much space available to be adding material amount of inventory for big and tall? And is there an issue that you're going to have to deal with that?

Douglas S. Ewert

Yes, David. We've been managing our inventories down in specifically The Men's Wearhouse and Moores, but in all 3 chains over the last few years. And so there's room for the product. Our stores are not cramped by any stretch of the imagination.

David M. Mann - Johnson Rice & Company, L.L.C., Research Division

And then in terms of Vera Wang, can you just talk a little bit more about how impact or what kind of penetration you'd to expect see in terms of tux rental from that product?

Douglas S. Ewert

Well, it's going to grow. I'm not prepared to release a number. But it's come out of the box stronger than we anticipated, and we have big expectations for it.

Operator

And our next question is a follow-up from the line of Betty Chen.

Betty Y. Chen - Wedbush Securities Inc., Research Division

Yes, I had a few questions. First, Doug, you had mentioned one of the drivers was the silhouette change currently underway towards slimmer, trimmer looks. I was curious in your experience how long do these changes last in terms of driving the business? Should we expect that it could be driving updates to the wardrobe for the next 3 to 5 years or perhaps longer than that? And then secondly, in regard to the online business, it grew very nicely in 2011. Where do you see that as a mix of total sales over time? And if you could remind us the margin characteristic of the online business versus retail. And my last question is regarding K&G. It reached a positive -- I believe you mentioned positive EBIT margin in 2011. What additional milestones do you need to see? Is it remaining EBIT positive this year before you start to revisit store openings again at the K&G brand? And where do you see longer term the margin profile at that brand as well?

Douglas S. Ewert

Okay, Betty. That was a lot. The K&G business, we foresee returning K&G to EBIT margins that more resemble historical numbers that we've seen. And once we get to that, get closer to that, we're anxious to open more stores. There's some pretty significant markets in this country where we don't have a K&G presence, and then further leverage can come from that. As far as online goes, we are pretty low penetration right now in online business. I think the opportunity for us is to get our online business over time in the 5% to 10% range from a penetration to retail sales level. What we have been experiencing to date, though, tends to be somewhat more opening -- an opening price customer online. So it's a little lower margin than we experience in brick-and-mortar. But over time, that will, that should change.

George A. Zimmer

Fit, the modern fit.

Douglas S. Ewert

Oh, the modern fit. It's hard to tell on these trends. Double-breasted was around for quite a few years. It was important for probably 3 to 5. 3 button, I think had a longer run than that. 3 button now has really dropped off quite dramatically. But it had a strong run for -- I'm going to say more like 5 to 6 years. It's hard to say how long a trend like this will be around. But it seems that because this one is so attractive to particularly the millennials, that it should have -- I anticipate a pretty nice healthy long life.

Operator

And there are no further questions at this time. I would now like to turn the call back over to management for closing remarks.

Douglas S. Ewert

Thank you very much for your interest in our company and we'll talk to you next quarter.

Operator

Ladies and gentlemen, this concludes The Men's Wearhouse Fourth Quarter Earnings Conference Call. If you'd like to listen to a replay of today's conference, please dial 1(303) 590-3030 with the access code of 4518856. ACT would like to thank you for your participation. You may now disconnect.

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