Men's Wearhouse F2Q07 (Qtr End 8/4/07) Earnings Call Transcript

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Men's Wearhouse, Inc. (MW)

F2Q07 Earnings Call

August 22, 2007, 5:00 PM ET

Executives

Karen Roan - Sr. VP, DRG&E

Neill P. Davis - EVP, CFO, Treasurer and Principal Financial Officer

George Zimmer - Chairman and CEO

Analysts

Lauren Cooks Levitan - Cowen and Company

Janet Kloppenburg - JJK Research

Betty Chen - Wedbush Morgan Securities

Richard E. Jaffe - Stifel Nicolaus

Marc Bettinger - Stanford Group Company

Evren Kopelman - JP Morgan

David M. Mann - Johnson Rice & Company L.L.C.

Susan Sansbury - Miller Tabak + Co., LLC

Presentation

Operator

Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the Men's Wearhouse Second Quarter Earnings Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. [Operator Instructions]. This conference is being recorded, Wednesday, August 22, 2007. I would now like to turn the conference over to Karen Roan of DRG&E. Please go ahead, Ms. Roan.

Karen Roan - Senior Vice President, DRG&E

Thank you Erik. Good afternoon and welcome to the Men's Wearhouse second quarter 2007 earnings call. We will be making a number of forward-looking statements and all such statements are subject to risks and uncertainties that could cause actual results to materially differ from the expectations and assumptions mentioned today due to a variety of factors that affect the company, including the risks specified in the most recently filed Form 10-Q and Form 10-K. Today's call is copyrighted material of the Men's Wearhouse and cannot be rebroadcast without our expressed written consent. I would now like to turn the call over to Mr. Neill Davis, Executive Vice President and Chief Financial Officer of the Men's Wearhouse. Neill?

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

Thanks Karen and good afternoon everyone. As a reminder, the results for this year are being positively impacted by our acquisition of After Hours Formalwear in April of 2007. That acquisition after acquisition funding cost was accretive to diluted earning per share in the quarter by 24%, equivalent of $0.24 per share. This was ahead of our initial plan of $0.15 to $0.17 per share accretive impact and largely driven by realization of lower operating costs than initially anticipated.

Our general integration activities of After Hours with Men's Wearhouse center around conversion to a unitary branding strategy of the tuxedo rental business, an integrated multi-unit store management organization, a decentralized distribution model, and lastly, a common technology and system platform. This acquisition will undoubtedly enable us to reduce the cyclicality of our overall business, provide incremental sources of top line growth in the future, as well as enable continued margin... operating margin expansion. George will speak more on this acquisition and its longer term impact in a moment.

Excluding the accretive impact of After Hours in the quarter, our core businesses produced diluted earnings per share of $0.76 versus $0.65 per share last year. This improvement was achieved on a modest same-store sales increase of 1.1% for our US based retail stores, as well as continued strength from the company's Canadian-based stores, Moores, with comparable store sales increasing 8.4%.

Now for the details: total company sales increased 23.6% to $569.3 million. I want to highlight the tuxedo rental revenues representing 23.6% of total sales in the quarter, increased approximately 200%, which is largely influenced by the addition of After Hours. Tuxedo rental revenues excluding After Hours increased 16.4%.

Comparable store sales increased 1.1% for our United States based stores, at the high end of our initial expectations of flat to plus 1%. This performance versus plan is a reflection of stronger than expected results at our Men's Wearhouse stores, which was most visible in our tailored clothing categories. Last quarter we discussed regional weaknesses in California and Florida. Through the second quarter, the depth of the weakness in California has abated in contrast to the first quarter. However, Florida's weakness continues.

While our traditional stores have improved relative to plan, our K&G stores continue to be challenged as its same store sale results were down 6.9%; however, consistent with the tone achieved in the first quarter. Comparable store sales increased 8.4% for our Canadian-based stores and were sharply ahead of our initial guidance of plus 4 to plus 6. The strength of our brand awareness in Canada along with a continuing favorable macroeconomic backdrop drove increases in both transaction and average ticket.

Gross margin for the quarter increased 498 basis points to 48.21% from 43.23%. To put this substantial year-over-year improvement in perspective for you, I would highlight the following.

First, the mix of our revenues derived from tuxedo rentals has historically had a positive impact on our gross margins, given the inherently stronger margin profile of the rental business as opposed to that of our retail business. With the second quarter representing the seasonal peak of the rental business along with the acquisition of After Hours earlier in the year, the mix of rental revenues for the second quarter was 23.6% of consolidated sales versus a mix of 9.7% in the prior year quarter. Excluding the impact of After Hours, gross profit as a percentage of sales increased 60 basis points over the prior year and is a direct reflection of the success our merchants have achieved in expanding maintained margins across all of our retail concepts. This is being done principally on cost and not through price increases.

Included in this gross margin improvement at our core operations is a charge of approximately 66 basis points relating to our strategy of achieving a global merchandising assortment for the combined tuxedo rental operations of After Hours and Men's Wearhouse. Specifically, we eliminated a number of tuxedo rentals stouts [ph] in inventory that we do not believe would perform well on a combined basis. This action was faster and more aggressive than what we had previously been planning to; and done in order to accommodate new replacement product order flow.

Selling, general, and administrative expenses as percent of sales increased 253 basis points to 33.69% from 31.16%. This increase is due to the inclusion of the operations of After Hours. However, excluding the impact of After Hours, the core business has generated 19 basis points of expense leverage, which was primarily due to receipt of proceeds of business interruption insurance reimbursements related to store closures in prior periods.

Weighted average diluted shares outstanding of 54.366 million were down 158,000 shares from the prior year. Share repurchases in the quarter were 495,900 shares at a value of approximately $24.7 million. And as reflected in our press release today, we have replenished our share repurchase authorization to a level of $100 million.

Total retail inventories excluding After Hours on a per store basis were flat of the prior year quarter. During the quarter, we opened nine Men's Wearhouse stores, two K&G stores, and closed nine After Hours stores. We also expanded or relocated eight Men's Wearhouse stores, three at K&G, and three at After Hours, all of which resulted in a 1.4% increase in gross square footage for the quarter.

Our plan for the full year call for a total of 24 Men's Wearhouse stores, 12 new K&G stores, and the closing of 22 After Hours stores. It also calls for expansion/relocation of 31 Men's Wearhouse stores, five K&G, 11 After Hours, and 10 Moores stores, also representing a 17% increase in retail square footage over the prior year. That covers the details of the second quarter results.

For the upcoming third quarter, we are looking for a low single-digit increase in comparable store sales for our Men's Wearhouse stores, which is expected to be offset by a mid single-digit decrease at our K&G stores, thereby resulting in a flat to increase of 1% range for our U.S. based store group.

In Canada, we are projecting a plus 2% to plus 4% increase. The contribution to revenues for the third quarter from the operations of After Hours is expected in the range of $64 million to $66 million. This update for the third quarter will result in full year comparable store sales increases in the U.S. of flat to up 1% and a plus 4 to plus 5 increases in Canada. Full year revenues for After Hours are expected in a range of $208 million to $212 million.

I would point out that this top line expectation for After Hours is lower than our previous guidance and primarily due to our decision to dispose off the wholesale tuxedo rental operations historically conducted by After Hours. In July, we sold the wholesale customer list to Jim's Formal Wear, the largest wholesale rental tuxedo supplier in the United States, and are in a process of transitioning that customer base to Jim's. This operating decision will allow us to remain focused on our retail customers, particularly during the seasonal peak.

The After Hours wholesale operations accounted for approximately 400,000 rental outfits annually, of which approximately one-half were processed during the peak season. From an earnings perspective, we are projecting diluted earnings per share in a range of $0.70 to $0.73 for the third quarter. After consideration of acquisition funding cost, After Hours is expected to be accretive to fiscal third quarter 2007 in a range of $0.06 to $0.07.

We are increasing our full year diluted earnings per share guidance to a range of $2.98 to $3.02. This is up from previous guidance of $2.84 to $2.94. And After Hours is expected to be accretive to the full year now in a range of $0.10 to $0.12 in diluted earnings per share. That wraps my comments as to the numbers and I will now turn the call over to George.

George Zimmer - Chairman and Chief Executive Officer

Thanks Neill. Well, without a doubt, there are numerous headwinds of a macroeconomic nature that are presenting challenges for the consumer in the United States today. However, while we are not immune to these pressures, our dominant line of business, Men's Wearhouse stores, is driven mostly by employment and wage trends and the tone of both of those measures remains generally healthy and constant. This coupled with our merchandising strategy, which includes significant margin growth, is predicated on a value promise of consistent quality at an everyday low price, has and will enable us to profitability manage through a variety of economic cycles.

As Neill observed at the opening of his remarks, our tuxedo rental business is one that is countercyclical to our retail apparel businesses, meaning that the external drivers to that business are dependent on census trends, particularly age demographics, as opposed to employment trends. The long-term growth trends for the 27 to 29-year-old demographic, the echo boomers, are quite favorable. In addition, the tuxedo rental business is counter-seasonal to out retail apparel businesses. The seasonal peaks in tuxedo rental occur in the second and third fiscal quarters, while the seasonal peaks in the apparel business occur in the fourth and first fiscal quarters.

Five years ago, in fiscal 2002, which was the bottom of the last economic downturn, tuxedo rental revenues comprised only 2.5% of our consolidated revenues. Next year, fiscal 2008, we are estimating that tuxedo rentals will represent approximately 17% of consolidated sales. This growth drives earnings more than sales. But what has been developing over the years within our portfolio of businesses is a balancing of both short-term seasonality and long-term cycles in a way we believe that lessens the business risks inherent in our group of businesses. However, this fiscal year will represent an extreme as it relates to the seasonal adjustments, given the inclusion of After Hours.

To remind those on this call, we completed the acquisition of After Hours in April of this year, and have laid out internally an integration plan that will enable us to start off the beginning of the rental season in January 2008 with a unified approach across over 1000 store fronts under an integrated multi-unit store management organization on a common reservation system and under a common brand MW Tux.

In my meetings with the operating team running this integration, Charlie Bresler, our President; Doug Ewert, our COO; and Bill Melvin, our CIO; I believe we are on track to meet that deadline. We are already feeling the effects of the upside from the combination of the After Hours organization with that of Men's Wearhouse. As you heard Neill earlier report, we are running ahead of our financial targets through the second quarter. Based on that experience, we have increased our outlook for the year and that is reflected in the guidance that Neill provided.

While many aspects of our business are strong and improving, some are less so. K&G, our big box deep discount retail concept, continues to be challenged with non-employment related macroeconomic trends, namely rising energy and housing costs. In addition, we have increased the store base of K&G over the last 12 months by 18%. With most of that growth in existing markets, our internal analysis suggests that we maybe experiencing a higher than expected level of cannibalization of sales from existing stores, thereby exerting pressure on our comparable store sales results, as we've reported.

I will say that our management team at K&G is doing a great job of mitigating weaker sales results by improving markups, primarily cost-driven, as Neill said, controlling markdowns and controlling operating costs. The result, operating income at K&G is estimated to be approximately the same this year as compared to last year, even under the weight of a negative 6.9% comparable store sales result in the second quarter. At the same time, we do remain focused on building the K&G brand through initiatives such as, increasing our boys merchandised assortments that customers seem to be responding well to, the development of a frequent shopper program expected to come online within the next 12 months, as well as continuing to spend our advertising dollars on television, not promotional print.

Our business at Moores, our Canadian subsidiary, and TwinHill, our corporate uniform program, continues strong. MW Cleaners continues to add stores and make progress.

In summary, we are pleased with our consolidated results, happy with the pace and results of the After Hours integration, satisfied with our margin growth and we remain cautiously optimistic about the balance of the year. We will take your questions now, thank you.

Question And Answer

Operator

Ladies and gentlemen, we will now begin the question and answer session. [Operator Instructions]. Our first question is from Lauren Levitan with Cowen. Please go ahead.

Lauren Cooks Levitan - Cowen and Company

Good afternoon. With the significant increase in tuxedo rental penetration of the total business now, George, can you share any thoughts that you have on how to better leverage that rental customer to convert them to a retail shopper over time? I know that's something that you've worked on in the past, but now with so many more young tuxedo rental customers that you have access to, do you have any plans under MW Tux for how to drive that rental to retail conversion. And then Neill, I was hoping you could comment on what assumptions you are making for some of those markets that had been lagging like Florida, what assumptions you have embedded in your comp guidance for the balance of the year. Are you assuming that it gets any better, gets... stays the same or gets worse? Thanks very much.

George Zimmer - Chairman and Chief Executive Officer

Well, in terms of the rental-to-retail question, which, Lauren, as you point out is extremely important, we are very excited about how we are doing with separates currently, and we are planning on expanding our separates presentation significantly going forward. This seems to be much more appealing to the younger customer who is the primary tuxedo rental customer. So that would really be I think the simplest answer.

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

As to the regional variations, particularly Florida, our outlook is assuming that there's really no change or incremental improvement in that state, and that California stays at a similar type of tone although now quite as difficult as we experienced in the first part of the year.

Lauren Cooks Levitan - Cowen and Company

Great. Thank you very much. Good luck.

Operator

Our next question comes from Janet Kloppenburg with JJK Research. Please go ahead.

Janet Kloppenburg - JJK Research

[indiscernible]

George Zimmer - Chairman and Chief Executive Officer

I am not hearing you well.

Janet Kloppenburg - JJK Research

With regard to your outlook, was there something in last year's numbers that was an investment spend as well that you don't have this year, and with respect to the IT spend, I was just wondering are we seeing results in the operating margin now or are we... is the investment still outweighing the incremental benefit that we should look forward to in the future? And lastly, if you could give us a cash flow [ph] outlook? Thanks.

George Zimmer - Chairman and Chief Executive Officer

Janet, I didn't hear the first question. Well, let me answer the second question, which I think I heard about whether or not our operating margins are growing relative to our IT spend to be profitable. And the answer is absolutely yes.

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

Operator, why don't we move on, I mean, I don't know whether we've lost Janet. Maybe she can queue up again in a moment.

Operator

Thank you. Our next question comes from Betty Chen with Wedbush Morgan. Please go ahead.

Betty Chen - Wedbush Morgan Securities

Thank you. Good afternoon everyone. I was wondering, Neill, if you can talk a little bit about the K&G business, seems like so far the first half has been rather challenging and, as you mentioned, probably due to energy and some of the housing volatility. Can you talk a little bit about what is embedded in your assumption for the mid single-digit negative comp for the third quarter and if we should also think about similar trends for the fourth quarter? Thank you.

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

I mean, really what's driving that K&G performance negative comp is primarily traffic-driven, and the expectation is that what we expect to see in the third quarter potentially can repeat itself in the fourth quarter. That's inherent in the overall guidance that we have just given. I will highlight the fourth quarter is an easier comparable period for K&G and we remain hopeful, but we certainly haven't been too aggressive in embedding that easier comp compare in our guidance.

Betty Chen - Wedbush Morgan Securities

And then is there any way you can talk a little bit about the TwinHill operation? I know in the last call you mentioned that it was going to be a little bit more accretive in the fourth quarter. Are there any new contracts or deals or any update on what's going on in that division that you can tell us about the ongoing strength there?

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

George?

George Zimmer - Chairman and Chief Executive Officer

Well, I think that we have decided that we do not want to report on specific accounts on these quarterly calls, but we will report that our sales revenues are dramatically ahead of this time last year and we are looking for dramatic increases again next year based on commitments that we have already received. So we are extremely happy with TwinHill right now.

Betty Chen - Wedbush Morgan Securities

Thank you and good luck.

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

Thanks.

Operator

Our next question comes from Richard Jaffe with Stifel Nicolaus. Please go ahead.

Richard E. Jaffe - Stifel Nicolaus

Thanks very much and congratulation guys on the terrific acquisition. The question really relates to, I guess, a bigger picture, your view of the economic outlook for K&G struggling a bit and it's more moderating of income consumer perhaps struggling a bit as well. Do you see that possibly carrying over to the Men's Wearhouse business or for that matter, has it begun, what is the outlook for the men's apparel business for second half?

George Zimmer - Chairman and Chief Executive Officer

Well, if I might... Neill, you can talk about the numbers in a moment, but I would say that, first of all, it's not a black or white phenomenon. So it happens already to some degree at Men's Wearhouse, as household lose between $1000 and $5000 of disposable income because of increased energy and housing. Quite often that comes out of men's clothing spending, whether they are a K&G customer or Men's Wearhouse customer or Joseph Banks customer or a Saks Fifth Avenue customer. It's a continuum. Having said that, Men's Wearhouse business seems surprisingly solid and we are very happy about that since that's our main business. At K&G, I don't know that we can really expect to see significant turnaround until there is some psychological shift foretelling a change in the outcomes of our middle and lower income people in America.

Richard E. Jaffe - Stifel Nicolaus

So, K&G is more in a tread water mode, but Men's Wearhouse, I would agree that it's been surprisingly strong the last couple of quarters. I am sorry, Men's Wearhouse stores has been surprisingly strong, and there is nothing to suggest that that's faltering at this point.

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

George, I might add, I think the stability of the core through Men's Wearhouse gives us confidence that I think that reaches down to K&G. Now, it's not going to pull K&G up to the kind of performance levels we have seen at Men's Wearhouse, but with the polarization of the economic base, K&G is just going to continue to be challenged at that end; but what I do take confidence in is seeing the... as you pointed out, rather strong and stable core business and that leads me to kind of follow on to second part of your earlier question which is general outlook for men's apparel.

I think if you look at the... some of the industry results that we look at tell us that the... for the spring season of fiscal '07, men's apparel was essentially flat over the same period last year; spring meaning the first half of the year. And I would tell you that the Men's Wearhouse business is running stronger than that tone. So, it looks like it's abating a bit for men's clothing season over season. But it is again moderate, it's not extreme and that's... that relates to the kind of tone that we have been saying now for quite some time now. So, it's a moderate grower and we feel pretty good about the strength of our core.

Richard E. Jaffe - Stifel Nicolaus

Yes. Now given the environment, it's quite surprising. Thanks very much.

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

You bet.

Operator

Our next question comes from Marc Bettinger with Stanford Group. Please go ahead.

Marc Bettinger - Stanford Group Company

Hi. Congratulations everyone. Neil, first question, is it fair to say that you are still expecting $12 million to $15 million of incremental savings at After Hours in 2008?

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

Incremental savings, yes.

Marc Bettinger - Stanford Group Company

Okay. So, the number hasn't changed?

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

No, it hasn't. I mean, I would tell you that the upside clearly that we've realized in the second quarter and it passed through for the balance of this year. I mean, we essentially adopted after a careful consideration the operating plan of the business that we acquired. And what we did is layer on top that the known incremental investments that we felt that we were going to need to make to consolidate the two platforms, specifically distribution issues as well as systems issues. So we've been pleasantly surprised. I think it's a transition from one ownership to another, and I think in that happening we are in essence realizing some of this upside sooner rather than what we thought might be possible. We really are quite focused on the things George outlined earlier and we are not prepared to say that that upside we experienced in the second quarter is translatable and is incremental to next year. But when we get to the fourth quarter of this year and we report those results, we'll be more articulate for you about what our outlook for '08 is, but we feel pretty good about that too.

Marc Bettinger - Stanford Group Company

Okay, great. How many stores do you think are being affected by the cannibalization at K&G?

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

It's... I would say there are about 15 stores that we think are being impacted. We will anniversary some of this heavier new store opening that George talked about in the fourth quarter, which will give us better visibility as to what that true impact is. So, I mean, the numbers you are seeing us produce for the first quarter and the second quarter at K&G, it's not a pure economic thing. We think there' are some just ramping issues that we will need to maneuver through.

George Zimmer - Chairman and Chief Executive Officer

And of course, it didn't help when our store at 42nd and Lexington closed.

Marc Bettinger - Stanford Group Company

Okay. And can you comment on tux prices at Men's Wearhouse and After Hours?

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

In terms of what?

Marc Bettinger - Stanford Group Company

Have they been increased, are they the same since the acquisition?

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

I will tell you that year-over-year without getting specific as to what brand is coming from, our average rental prices are up. And that's been a key driver... that's been a driver, not the sole driver, to our increases in top line in the rental business.

Marc Bettinger - Stanford Group Company

Okay. So if I understand it correctly, in the entire consolidated tux rental business, consolidated... well, the prices are up?

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

That's correct.

Marc Bettinger - Stanford Group Company

Okay. Do you have the same-store numbers for After Hours?

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

No, we don't and we won't report one until we get to the second quarter of next fiscal year.

Marc Bettinger - Stanford Group Company

Okay. Thanks guys.

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

You bet.

Operator

Our next question comes from Brian Tunick with JP Morgan. Please go ahead.

Evren Kopelman - JP Morgan

Hey, it's Evren Kopelman for Brian. Two questions. The first one, maybe I am not understanding this correctly, but you were expecting on the last conference call $0.03 to $0.05 accretion from After Hours and now the number is $0.10 to $0.12. So the difference is about what you... what the second quarter was better by, which to me means for the second half you haven't really changed your accretion dilution assumption. And you did mention that the pass through of some of these lower operating costs that you saw in the second quarter, so I just thought there was no impact, or you weren't changing your second half accretion dilution estimate and I was wondering why not given the operating costs were so much lower. I mean, it was 50% better in the second quarter of the accretion.

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

Well, that's because I don't believe it's incremental. I mean, it's just... it's a faster realization, not anything incremental, because we have been doing nothing to really impact and change our business, as we will when we will get into fiscal '08. We are most focused on integrating the two businesses and so we are not really... again, it's a timing thing, and we are being it sooner rather than later, and that's why we are not changing any of our outlook in the third quarter as a result of the acquisition, and the experience we have had in the second quarter, and you are right, it is simply a pass through.

Evren Kopelman - JP Morgan

Okay, okay. And then the number, the dilution in the fourth quarter is about $0.27, if I added/subtracted correctly?

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

If you added and subtracted correctly, and if that's what the number is, that's... I am not going to opine to it since we are not giving fourth quarter discrete guidance.

Evren Kopelman - JP Morgan

Okay. And the second question is a little more longer term about the tux business. I calculated about maybe $140 million, $150 million from your non-After Hours tux business this year, about $210 million from After Hours. So about, let's say, $350 million of top line this year. I am curious where you think that business can grow to, kind of, what's an annual growth rate that you expect for that business. And then secondly, what kind of operating margin you think that business can have longer term, especially compared to your core apparel business?

George Zimmer - Chairman and Chief Executive Officer

Well, I believe that as a rough number, we are talking about doing $500 million in tux rental business in five years.

Evren Kopelman - JP Morgan

In five years?

George Zimmer - Chairman and Chief Executive Officer

Right.

Evren Kopelman - JP Morgan

And how about the profitability?

George Zimmer - Chairman and Chief Executive Officer

I don't have that right in front of me. I know it's right significant. Neill, do you?

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

No I don't. It's not... we don't segment our numbers quite like that, particularly in our long-term model. But I will tell you that... and as have been talking for quite some time now, the tuxedo rental business is uniquely profitable, just given the nature of its business. As we increase the mix of that relative to the whole, as George indicated, you are going to get margin expansion out of that. So that's the direction, it will be up, but not going to get into a discrete articulation of what that number is.

Evren Kopelman - JP Morgan

Okay, great. Thank you.

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

You bet.

Operator

Our next question comes from David Mann with Johnson Rice. Please go ahead.

David M. Mann - Johnson Rice & Company L.L.C.

Yes, thank you. In terms of the comment you made on gross margin, can you just elaborate or clarify what the charge was on the tux styling? I'm not sure I understand that.

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

We just basically pulled inventory and wrote it off. We took slow moving, slow turning inventory. It ranges from coats to pants to accessories, just the whole outfit and it's not like these are discrete individual outfits. They are more pieces than anything else that we did not feel, at least our merchants did not feel that would fit well with what they want to achieve on a go-forward basis. So, David, in essence it's just an inventory write down.

David M. Mann - Johnson Rice & Company L.L.C.

Very good. And you had expected to do that within the context of the numbers you have given us in the past or--?

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

No, no, we had not. What we had envisioned is that over time through our normal amortization and work through of the inventory, we would be able to deal with this. But we made a decision to accelerate that and get positioned much cleaner and stronger going into next year. So it was I think a strategic decision, will have positive operating implications. So [indiscernible].

David M. Mann - Johnson Rice & Company L.L.C.

And so you had a stronger quarter in tux even with this charge, is that one way of looking at it? That charge is included in the accretion you talked about in the quarter?

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

Well, no, the accretion relative to After Hours, this inventory adjustment was made on Men's Wearhouse. It would be resident in the core operations as opposed to After Hours.

David M. Mann - Johnson Rice & Company L.L.C.

Very good. And the other callout you made on SG&A that was basically just under 20 basis points for the insurance proceeds?

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

Yes.

David M. Mann - Johnson Rice & Company L.L.C.

Okay. In terms of the marketing arrangement you have with David's Bridal, can you just give an update on progress there and whether that had any... whether that was ramped up in the quarter?

George Zimmer - Chairman and Chief Executive Officer

Well, the good news is that it's been a very slow process and we expect it to kick-in the high gear within the next 30 to 60 days. So, we are expecting to get a significant up-pop when this materializes.

David M. Mann - Johnson Rice & Company L.L.C.

Very good. And then on the sourcing benefit for gross margin, the 60 basis points that you called out, can you just put that into perspective or context after all of the strength you had in gross margin from sourcing last year, are you... the 60 basis points in the quarter was consistent with what you are looking for, is that the type of gain we should be looking for going forward? Can you just comment on that?

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

Well, relative to the quarter, that was better than our plan. I won't tell you how much better, but it was better than plan, not a whole not, but better. That's why I made that discrete description of the inventory issue so that you can get a forward flavor of the core gross margin. In essence, if you retrace my comments, it would end up being about 126 basis point improvement in the quarter. And again, it's largely driven by those operating activities that you just mentioned, our private label and direct source penetration. We still look for margin improvements in the back half of the year from the same places and it will flow according to seasonality, but we continue to see strength coming from that source. George, do --?

George Zimmer - Chairman and Chief Executive Officer

And I think I don't recall what the number was last year, but it seems that the number is going to go sown gradually over time because it's harder to generate the incremental increases. So, 66 points was pretty good.

David M. Mann - Johnson Rice & Company L.L.C.

Very good. Thank you.

George Zimmer - Chairman and Chief Executive Officer

Thank you.

Operator

Our nest question comes from Susan Sansbury with Miller Tabak. Please go ahead.

Susan Sansbury - Miller Tabak + Co., LLC

Hi, yes, thank you very much. Neill, you closed, what was it, 22 After Hours stores in the period. Do you expect to close any more between now and the beginning of next year?

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

Well, I think the 22 is our full year number, we closed actually 9 in the period.

Susan Sansbury - Miller Tabak + Co., LLC

Okay.

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

Included in the 22 is that 9. So that's what I meant to say.

Susan Sansbury - Miller Tabak + Co., LLC

Okay. So you closed some in the first quarter. Were they losing money?

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

They were underperforming.

Susan Sansbury - Miller Tabak + Co., LLC

Okay. And just a nitpicking question, could you go over the sale of the wholesale business again for me and will its divesture be... have positive margin implications?

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

We don't believe it will have dilutive margin implications. The primary reason that we did this is to allow us to be discretely focused 110% on our retail business. The wholesale business has some nuances to it that created some complexities at our service centers that we felt did have some kind of dilution to our retail efforts and it essentially was an effort for us to just remain more focused on what we are about and wholesale business is not what we want to be above.

Susan Sansbury - Miller Tabak + Co., LLC

Okay. So the increase in the accretion level for After Hours for the year has... really nothing to do with the sale of the wholesale business or the closing of the stores?

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

We expect it relative to the wholesale to be neutral, at least that's the goal. Therefore there will be no change in the accretive impact and the stores, you're really not going to feel that until next year.

Susan Sansbury - Miller Tabak + Co., LLC

Okay. And I just essentially want to get you to amplify on your comments about the Men's Wearhouse business being a stable business in the second half. What is the... what are you are trying to tell me here, are you talking about top line or margin or both?

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

Top line.

Susan Sansbury - Miller Tabak + Co., LLC

Okay.

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

And margin. I mean, it's the same. What we have in front of us relative to profitability standpoint continues to be realized.

Susan Sansbury - Miller Tabak + Co., LLC

Right.

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

And we do not believe the things that are happening externally are going to diminish that and so we remain, as George said, very bullish about it. Relative to the top line, I think as he also said in his opening comments, employment and wages and that's the driver to our core business and we are hard pressed to really feel like that's going to drop significantly over the near term, and that's why we have the confidence in that business.

Susan Sansbury - Miller Tabak + Co., LLC

Okay.

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

George, is there anything that you would want to add to that?

George Zimmer - Chairman and Chief Executive Officer

No, but I think that's actually the single most important point that we have made, which is that at K&G, they are getting hurt by rising energy and housing; at Men's Wearhouse, it's steady employment and rising wages that keeps Men's Wearhouse strong.

Operator

Our next question comes from Janet Kloppenburg with JJK Research. Please go ahead.

Janet Kloppenburg - JJK Research

Hi, I apologize for not being available earlier. Congratulations on a tremendous quarter. Couple of questions, Neill, whether [ph] it's been asked, but I have been on the call for most of the time. I think you said that the contribution from After Hours in the quarter was better then expected, operating expenses being lower. I am wondering if there is some benefit there to the outlook for this business to lose money in the fourth quarter, perhaps you've lowered that loss outlook. If there might be some implication of that in the guidance, I am wondering if I was right on that?

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

No, I haven't changed any outlook as it relates to the fourth quarter.

Janet Kloppenburg - JJK Research

Is there any opportunities for that loss to be lower in the fourth quarter?

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

Sure, there is opportunity.

Janet Kloppenburg - JJK Research

Okay. So, all being equal then there could be additional accretion if that loss is less than expected in the fourth quarter?

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

Sure, but that's... our guidance is assuming that this experience in the second quarter was timing. You have to realize that all of our operating eyes, Charlie and Doug and Bill are... we have got a lot going on to just transition and integrate as opposed to operating.

Janet Kloppenburg - JJK Research

Okay.

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

So, and those benefits --

Janet Kloppenburg - JJK Research

It's okay. I just wanted to touch on that, but I didn't mean to... I understand that may or may not be is what you are saying.

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

Yes, I think that wakes [ph] the real opportunity that you are going to see as a result of all these efforts.

Janet Kloppenburg - JJK Research

Okay. And then just on K&G for a second, I understand that you have easing comparisons going forward. But with the economy and with this 15 stores cannibalization issue, have you guys considered the fact that the business trends could weaken at K&G? In other words, instead of sort of staying the same or firming that perhaps there is some thought to it worsening? Is there any reason why... I'd like you to make me feel comfortable that it wouldn't worsen.

George Zimmer - Chairman and Chief Executive Officer

Okay, here's what I can tell you, Janet. You noticed that we have... our Board's approved $100 million stock repurchase.

Janet Kloppenburg - JJK Research

Okay.

George Zimmer - Chairman and Chief Executive Officer

And we did that because we wanted to send the message that even if things were to weaken and God help us it could, we would still be financially strong enough to make a $100 million stock repurchase. So, without giving you the details on individual divisions, we still feel pretty good about things even in kind of the worse case.

Janet Kloppenburg - JJK Research

Well I appreciate that George, but I was... knowing you guys the way I know you, I figured you have some strategies in place and I know you are up against the weaker women's comp from the back half of last year. I was just thinking maybe you thought there was some execution initiative you could take where you could help the business improve.

George Zimmer - Chairman and Chief Executive Officer

I wish I had an answer, but we don't have an answer other than macro conditions.

Janet Kloppenburg - JJK Research

Okay.

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

Well, Janet, let me just add. I mean, we are continuing to fund the advertising and television that George mentioned that's in support of the brand and they are... and the operating team there is working on some new merchandise programs and expansion of existing ones to help through this process. I mean, at some point in time the macro trends are just... you can't deal with it. And then the last thing I would led you with is the comment George made about the relative profitability even with the weight of the challenges we have for this year.

George Zimmer - Chairman and Chief Executive Officer

Yes, I mean, imagine was almost a 7% negative comp, we are making the same money --

Janet Kloppenburg - JJK Research

Right.

George Zimmer - Chairman and Chief Executive Officer

I think that's kind of the reassurance that that I feel.

Janet Kloppenburg - JJK Research

Right. Okay. And with easing comparisons in the back half perhaps there is an opportunity for both comp and even margin to improve slightly?

George Zimmer - Chairman and Chief Executive Officer

From your lips to God's ears.

Janet Kloppenburg - JJK Research

Okay. I'll go for that. And on gross margin, Neill, if you take... if you exclude the impact from that, the tuxedo rental write-off, we are looking at over 120 basis point improvement in the core business, is there any reason why we couldn't look forward to that going forward?

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

Again, as I said to someone earlier, it just depends on the seasonality of our business relative to those basis points improvement, but I am not giving callouts exactly what that delta is in the third and fourth quarter. But the sources of that improvement continue.

Janet Kloppenburg - JJK Research

Okay. And then I just wanted to ask about After Hours, I think there was some consideration in fiscal '08 to adding product to those stores, perhaps core instead of just renting product to selling product and I am wondering if there is any further push on that issue? Thank you.

George Zimmer - Chairman and Chief Executive Officer

We are looking at what we can do on that issue. We see there maybe an opportunity, we are investigating.

Janet Kloppenburg - JJK Research

Okay, great. Congratulations again. Talk to you soon.

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

Thanks.

George Zimmer - Chairman and Chief Executive Officer

Thank you.

Operator

And at this time this concludes our question-and-answer session. I'd like to turn the call back over to management for their concluding remarks.

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

Once again, we thank everybody for their time today, and their interest in the Men's Wearhouse. We look forward to talking to you next quarter.

George Zimmer - Chairman and Chief Executive Officer

And in addition, our next call is scheduled for Thanksgiving eve. If that's not working for you people, please let Neill know and we'll change the date.

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

That completes it operator.

Operator

Ladies andgentlemen, this does conclude the Men's Wearhouse second quarter earnings conference call. You may now disconnect. And we thank you for using AT&T Teleconferencing.

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