Men's Wearhouse, Inc. Q3 2007 Earnings Call Transcript

| About: Tailored Brands, (TLRD)

Men's Wearhouse, Inc. (MW)

Q3 FY07 Earnings Call

November 28, 2007, 5:00 PM ET

Executives

Ken Dennard - DRG&E

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

George Zimmer - Chairman and CEO

Analysts

Lauren Cooks Levitan - Cowen and Company

Richard E. Jaffe - Stifel Nicolaus

Janet Kloppenburg - JJK Research

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

Marc Bettinger - Stanford Group Company

Betty Chen - Wedbush Morgan Securities

Evren Kopelman - JP Morgan

Susan Sansbury - Miller Tabak + Co., LLC

Operator

Ladies and gentlemen, thank you very much for standing by and welcome to the Men's Wearhouse Third Quarter Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. [Operator Instructions]. As a reminder, this conference is being recorded Wednesday, November 28th of 2007.

I would now like to turn the conference over to Ken Dennard with DRG&E. Please go ahead, sir.

Ken Dennard - DRG&E

Thanks Mike. And good afternoon and welcome to Men's Wearhouse third quarter 2007 earnings call. We will... just to let you know, 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 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. Today's call is copyrighted material of Men's Wearhouse and cannot be rebroadcast without our written... 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 Ken and good afternoon. Earlier today, we released our third quarter results and updated our outlook for the balance of the year.

Before we get into the details of those results and outlook here are the highlights. Third quarter earnings per share of $0.69, which represents a year-over-year growth of 19% was slightly below our original guidance of $0.70 to $0.73. However, it was at the high end of our revised guidance range of $0.66 to $0.70, provided at our mid-quarter update in early October. The third quarter 2007 results included $0.05 accretion from our acquisition of After Hours Formalwear earlier in the year and a strong Canadian dollar provided one penny of upside.

I would also point out that our effective tax rate was higher this year over last year, which had the effect of increasing last year's earnings per share about $0.02. Our operating income margin increased 21 basis points to 11.55% as gross margin expansion more than offset increases in SG&A expenses.

Based on our initial sales results for November, we believe the fourth quarter will be challenging, and therefore have modified our guidance. We are making modest changes to our promotional activities, and we have reviewed our inventory positions in consideration of the range of guidance we are providing. Overall, we feel comfortable with our mix and levels of inventory and do not foresee issues, which would cause us to modify our historical markdown cadence. That said, we are establishing our fourth quarter '07 earnings per share in a range of $0.43 to $0.48 and for the full year, a range of $2.87 to $2.92.

Now for the details; total company's sales increased 19.1% to $512.1 million. I want to highlight that tuxedo rental revenues representing 18.8% of total sales in the quarter increased to 178.6%, which is largely influenced by the addition of After Hours. Tuxedo rental revenues excluding After Hours increased 13.6%. At our mid-quarter update, we indicated that we would be below plan with our sales estimate for After Hours. We were on target with those lower estimates.

Comparable store sales decreased 2.1% for our United States-based stores, below our initial expectations of flat to an increase of 1%. This performance versus plan is a reflection of weaker than expected results at our K&G stores, and seasonally warmer weather conditions during the quarter and continued weakness in the California and Florida markets.

We estimate that the combined effects of one, the under performance in our seasonal product categories affected by the warmer weather patterns; and two, the persistent regional challenges in California and Florida reduced our U.S. comparable store sales by approximately 2%. Said differently; without these influences, our U.S. comparable store sales results would have been flat for the quarter.

Comparable store sales increased 0.6% for the company's Canadian-based stores, and was below our initial guidance of an increase of 2% to 4%. As in the U.S., our Canadian business was impacted by the unseasonably warm weather.

Gross margin for the quarter increased 385 basis points to 46.95% from 43.10%. We continue to realize year-over-year improvement in merchandise margins, as well as benefit from the accretive impact of a greater tuxedo rental revenue mix of our consolidated sales. The mix of rental revenues for the third quarter as I just mentioned was 18.8% of consolidated sales versus a mix of 8% in the prior year quarter.

Excluding the impact of After Hours, gross profit as a percentage of sales increased 133 basis points over the prior year, and is a direct reflection of the success our merchants have achieved in expanding product margins across all of our retail concepts. As we have said repeatedly over the last year, this is being done principally on cost and not through price increases.

Selling, general and administrative expenses as a percentage of sales increased 364 basis points to 35.40% from 31.76%. This increase is primarily due to the inclusion of the operations of After Hours. Excluding the impact of After Hours, SG&A had 58 basis points of expense deleveraged primarily due to the comparable store sales decreases in the United States.

Weighted average diluted shares outstanding of $53.8 million or 1.1 million shares less than the third quarter of the prior year, 818,000 shares were repurchased in the quarter at a value of $34.1 million.

As I indicated at the beginning of our call, we're comfortable with our inventory position and believe it remains balanced and in line with the current tone of customer buying trends. Specifically, total retail inventories for our U.S.-based operations excluding After Hours on a per store basis were down 3.3% over the prior year quarter and for our Canadian-based stores were down 2.4% on a per store basis.

During the quarter we opened seven Men's Wearhouse stores, three K&G stores, and closed a net seven After Hours stores; specific on After Hours, that will be five openings and 12 closures. We also expanded or relocated four Men's Wearhouse stores, one K&G store, and five Moores stores; all of which resulted in a 1.4% increase in gross square footage for the quarter. Our plans for the full year at the end call for a total 25 Men's Wearhouse stores, 12 new K&G stores, the inclusion now of the After Hours acquisition, which had a store count of 509 stores and since that acquisition, we have opened 10 stores and closed 24. That would bring the full year estimate increase in square footage to 17.3% over the prior year. That covers the details of the third quarter results, and now for our outlook for the final quarter of the year.

Comparability of this year's fourth quarter to that of the prior year is being significantly influenced by a number of items and events, some of which occurred in last year's quarter and some of which in this year's quarter. We will offer detail and hopefully that will allow for clear interpretation and assessment of our earnings per share performance.

Let me review last year's items and events. First, the fourth quarter of last year included 14 weeks of operations based on a 53-week retail calendar. That additional week of operation added $0.08 to diluted earnings per share.

Second, our effective tax rate of 28.7% was significantly lower than this year's rate of 37.4%. The primary driver to this lower effective rate concerned adjustments to tax reserves associated with favorable developments on certain outstanding income tax matters. The impact of that lower effective tax rate increased diluted earnings per share of $0.11. The net effect of these items increased the prior year's diluted earnings per share by an aggregate of $0.19.

Concerning this year's fourth quarter, with the acquisition of 509 store chain After Hours earlier this year, tuxedo rentals will now approximate 6.3% of consolidated sales for the fourth quarter as compared to the prior year quarter mix of 2.7%. The fourth quarter represents the seasonal low point for our tuxedo rental revenues or approximately 11% of our total annual rental revenues. This seasonal profile results in operating losses in the fourth quarter as a gross profit from rental revenues are insufficient to cover fixed infrastructure costs. Based on that seasonal profile, and after consideration of funding costs, After Hours is expected to be dilutive to the fourth quarter fiscal 2007 in a range of $0.31 to $0.32.

The fourth quarter of this year includes costs associated with relocation of the company's corporate offices in Houston as well as the effect of our current year adoption of the Emerging Issues and Task Force bought in '06-'07, which concerns accounting for sabbatical leave and other similar benefits, pursuant to FASB 43. The impact of these items to diluted earning per share is approximately $0.02. The net effect then of these items is expected to decrease the current year's fourth quarter diluted earning per share by $0.33 to $0.34. Applying these adjustments to this year's fourth quarter and last year's fourth quarter, diluted earning per share are then expected in a range of $0.77 to $0.81 for the current year and would compare to the prior year of $0.76.

This adjusted year-over-year increase in diluted earnings per share for the fourth quarter is based on a flat to 1% increase in comparable stores sales for our Men's Wearhouse stores, a low double-digit decrease in our K&G stores resulting in a low single-digit decrease for our U.S. based group of stores. In Canada, we are projecting a flat to 2% increase.

Our full year diluted earnings per share guidance then is in a range of $2.87 and $2.92 as I said earlier. After Hours is expected to be accretive to the full year in a range of $0.05 to $0.06 in diluted earnings per share. Thus conclude my prepared remarks and now I'd like to turn the call over to George Zimmer.

George Zimmer - Chairman and Chief Executive Officer

Thanks Neill. Having managed through six economic slowdowns since our inception in 1973, the Men's Wearhouse is prepared to manage now; managing through macroeconomic uncertainties is not something that we as a company are unfamiliar with. Economic uncertainties in fact encourage industry consolidation, which we have benefited from in the past. Remaining focused on fundamentals, without undue distraction from events beyond one's control is also something we as a company are not unfamiliar with. We will not overreact to current conditions. So what will we do?

On the one hand, the addition of After Hours Formalwear to our existing tuxedo rental operations, now positions our company as the leading provider of tuxedo rentals in North America. Our team has now completed the primary integration of that operation into our existing infrastructure. Although a few key components remain to be completed, we will emerge, beginning in January 2008 under a unified brand, MW Tux, and are prepared to deliver an exceptional customer experience and value through 1,000 plus store fronts. We are excited with the power of the profit potential from such a leadership position, much as we have experienced and realized over the years at Men's Wearhouse, within the tailored clothing category.

As Neill highlighted earlier for you, the acquisition of After Hours this year will be accretive to fiscal 2007 EPS in a range of $0.05 to $0.06. He also told you that the timing of that acquisition and the highly seasonal nature of its operations will impact the cadence of the contribution of the earnings to the existing Men's Wearhouse results.

Let me be a more specific for you. The acquisition of After Hours this year included 10 months of that business' operation as we acquired the business in April. The two months not included represents seasonably low periods, and hence operating losses. Those two months on a pro forma basis would reduce the full year accretion this year to a neutral impact. While our operating plans for fiscal 2008 continue to be reviewed and fine tuned, we remain confident that expense reductions and other synergies will generate significant future EPS accretion and for more than just one year.

On the other hand, we have more work to do to fully realize the potential inherent in our K&G operations. K&G, our deep discount value apparel chain, which represents approximately 20% of consolidated sales is expected to generate mid single-digit operating margins this year, similar but not identical to last year. This performance however, will represent deleverage from the prior year, which is driven primarily from declines and comparable store sales. It partially offset by higher merchandise margins.

While macroeconomic conditions have played a significant part in those diminished results, we are not satisfied and hold ourselves to a higher performance standard. That said, we are actively evaluating tactical measures to pursue, to build on past successes and at the same time, mitigate current operating pressures until such time as we have better visibility as to what those measures will be. We are reducing our new store expansion program for K&G for fiscal 2008, building upon successes such as tuxedo rentals and remaining committed to improving underperforming operations such as K&G are only two of the areas that we're focused on in growing and improving our company.

New avenues of growth for the future are also at the forefront of our thinking. We have been busy on several fronts for the last several years developing our presence in the retail dry cleaning industry as well as the presence in the corporate wear industry. We continue to make progress on both fronts, now totaling almost 2% of consolidated sales and we'll have more to say on these areas at such time as we report our full year's results for 2007 and plans for fiscal 2008.

I don't have to tell anyone on this call today that staying at the top is in many ways just as challenging and complex as in getting there, ask Jack Nicholas or Tiger Woods. Our core operation in the Men's Wearhouse and its counter part in Canada, Moores clothing for men, both enjoy the number one market share in suits in their country. Our focus and intent is staying there, which requires refinement and fine tuning, not wholesale change and deviations from a successful economic model. Both chains are still enjoying year-to-date positive comps and increasing profits and sales.

Our merchandise teams continue margin expansion without putting those gains at risk from being overbought inventory positions. Our marketing team is in addition to television, creating an enhanced internet presence as evidenced in our improved tmw.com. Our Internet direct revenues are expected to grow 70% for the full year. This increase comes off a relatively small base, which we interpret to mean a significant growth opportunity. Our selling teams are successful without the benefit of early promotional activity which lowers merchandise margins and profits. Not to mention, spending marketing dollars on price instead of brand.

Our annual winter sale begins mid-December when winter actually begins and runs through the end of January. Thus we do more volume in January than November. Our support teams are doing their part as evident in our ability to bank a meaningful share of gross margin gains achieved by our merchandise and selling teams. It's from these initiatives, these efforts and these results that we are confident in our ability to manage profitability and growth in a macro environment that potentially seems to be settling in to a protracted slow growth rate.

We will now take your questions.

Question And Answer

Operator

Thank you very much, sir. [Operator Instructions]. Our first question comes from line of Lauren Levitan with Cowen and Company. Please go ahead.

Lauren Cooks Levitan - Cowen and Company

Thanks, good afternoon. Neill and George, I was hoping you could give us a little bit more color on what you've been seeing in November and how that may have differed from the trend at the different businesses that you saw in Q3. In addition, Neill, you said that you are making modest changes to promotional events. I am wondering if you could elaborate on those and then as it applies to the Q4 guidance, it appears that there is an embedded assumption of a meaningful deterioration in EBIT margins in the core business following nice improvements in the first three quarters of the year. Could you give us a sense of if there is any one-time things in nature or if that is a function of the lowered comp guidance and an expectation of greater promotional activity? Thank you.

George Zimmer - Chairman and Chief Executive Officer

Did that include the follow-up, Lauren?

Lauren Cooks Levitan - Cowen and Company

I guess so.

George Zimmer - Chairman and Chief Executive Officer

Let me just talk about some product information, which speaks to part of what you asked about. Through the third quarter, our suit business was actually descent; not good but, decent. And what was holding down the numbers was that outerwear and sweaters, cold weather items were performing miserably. Well, I've been out to our stores and I've looked at our sweaters and our cold weather items, and they are beautiful and they're priced right and now that the weather has started to turn in certain markets we are starting to see some performance in those items, but there is no improvement whatsoever in tailored clothing.

Operator

Thank you, ma'am. The next question comes from the line of Richard Jaffe with Stifel Nicholas. Please go ahead with your question.

Richard E. Jaffe - Stifel Nicolaus

Thanks very much guys. You have talked about the young men's business, the business that shows promise that naturally we see that as a strong sector. I wonder if there is any initiative that we can look for in the fourth quarter, in the young men's business to gain little crash over the new stores.

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

May not be in the fourth quarter, but there are things that the merchants are focused in on in the first quarter. George, you want to talk about that?

George Zimmer - Chairman and Chief Executive Officer

Yes, we are calling this modern clothing; and in fact we have launched on television just in the last couple of weeks a series of commercials that are using in some cases some rather young looking models for a Men's Wearhouse commercial, although wearing a sport coat with shirt tails out over a pair of blue jeans. So we are definitely cognizant of and going after the younger customer. And of course with the acquisition of After Hours, we now have an expanded mailing list of young men from tuxedo rentals and we are looking for increased leverage from that as well.

Richard E. Jaffe - Stifel Nicolaus

Could you just comment about the loyalty program, the Perfect Fit both in terms of young men and in terms of the tougher conditions. Is that an opportunity to drive the kind of stores to offer a better value or some incentive to young men?

George Zimmer - Chairman and Chief Executive Officer

It probably still comes under the category of cross-pollinization [ph] more than Perfect Fit, our loyalty program. I think the biggest challenge remains to get more of our tuxedo rental customers to become regular retail customers.

Richard E. Jaffe - Stifel Nicolaus

But in terms about the economic downturn, is there an interest in hitting them harder, marketing more aggressively to drive sales?

George Zimmer - Chairman and Chief Executive Officer

We haven't considered that. It might be a good idea. I do know that one of the things we have considered is that the tuxedo rental business does not seem to be tied to the same economic indicators as the men's tailored clothing business. So we feel there is some protection there.

Richard E. Jaffe - Stifel Nicolaus

That's helpful. Thank you.

Operator

Thank you very much sir. The next question comes from Janet Kloppenburg with JJK research. Please go ahead.

Janet Kloppenburg - JJK Research

Hi everybody. Neill may be you could help me understand the fourth quarter estimate. I know you went through great pains to cut last year's numbers, but the $0.43 estimate seems lower than where we had been before, but the After Hours loss seems that's where I had been. So, is this cut in the outlook solely due to the change in the comp store sales outlook and higher promotional activity plans for K&G, Men's Wearhouse and Canada?

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

Yes. The principle driver to that lower number are same-store sales results, the comps and particularly at K&G. We had anticipated mid single-digits, before we walked into the fourth quarter and before adjusting and updating our fourth quarter results and you see what K&G's results were for the third quarter, they were down 11%.

Janet Kloppenburg - JJK Research

Yes.

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

And is that tender and torn that is being pushed through for the fourth quarter is a key driver to the lowered numbers.

Janet Kloppenburg - JJK Research

You think... did you say that you expected low double-digit declines at K&G in comps in the fourth quarter?

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

Yes.

Janet Kloppenburg - JJK Research

And flat to 1% up at the core?

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

That's correct.

Janet Kloppenburg - JJK Research

Is that lower at core than you had originally estimated?

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

Slightly lower.

Janet Kloppenburg - JJK Research

Slightly lower, okay. And the disruptions that were witnessed in the After Hours distribution center conversion in the third quarter and some of the David's Bridal name transfers, are those now behind you?

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

Well, you are seeing, obviously we reflected third... it impacted the third quarter. It has been impacted in the fourth quarter and that's reflected in the numbers we've talked about today. And that those pressures should abate and continue to move through the system, we'll have some impacts in the fourth... first quarter of the coming year and they should abate and we anniversary those things in the second quarter.

Janet Kloppenburg - JJK Research

Could you just talk a little bit about the transfer, the name transfers from David's Bridal. What's happening there and what the remedy is for that please. Thank you.

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

The remedy.

Janet Kloppenburg - JJK Research

How do you fix it? I know you have new regionals, is it just a cultural issue?

George Zimmer - Chairman and Chief Executive Officer

No actually, if I might address this,

Janet Kloppenburg - JJK Research

Hi George.

George Zimmer - Chairman and Chief Executive Officer

Yes, hi Janet. This was a classic win-win solution executed by our President, Dr. Charlie Bresler. Instead of arguing with David's Bridal, we actually sat down with them and said, how can we make it better for you? And so we came up with an agreement that works so well that Charlie was just at a store manager meeting of David's Bridal's people that we are really now working together quite well.

Janet Kloppenburg - JJK Research

So you don't see any issues then with seeding the names from David's Bridal to the After Hours sales force.

George Zimmer - Chairman and Chief Executive Officer

It's close to a 100% now; and I think as was just mentioned by Neill, unfortunately people aren't booking their weddings for tomorrow, so there is a lag that will be probably through the entire first quarter before we start to see any benefit.

Janet Kloppenburg - JJK Research

George, do you think it's a wise strategy given the environment for the K&G business to become more promotional?

George Zimmer - Chairman and Chief Executive Officer

I think that there are a number of ways to look at the word promotional. One could say for instance that if one offered a solitary piece of merchandise at a lower price that one was in fact more promotional even if the net impact on margin was not so great as to lower margin. So I think it's a question of how one discusses it. I do not believe Neill's comment about us K&G being more promotional is reflective of lower margins at K&G, merchandise margins at K&G. So it's just a way of describing a marketing campaign more.

Operator

Thank you, ma'am. The next question comes from the line of David Mann with Johnson Rice. Please go ahead.

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

Yes, thank you. Good afternoon. Along the lines on K&G; you talked about slowing growth. Should we expect that to go to zero next year, and would you... are you looking at closing some stores? And if so, how many stores are underperforming?

George Zimmer - Chairman and Chief Executive Officer

No, we've opened 12 this year, and we are going to open three early next year, and we will report from there.

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

And in terms of the breakdown men's versus women's, can you just talk about is it uniform the weakness we are seeing between the two different categories and stores that have it versus those that don't have women's?

George Zimmer - Chairman and Chief Executive Officer

We are seeing greater weakness in our women's wear, but one of the things that we are investigating is whether that is more unique to us.

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

Okay. And then one last question on TwinHill; can you just talk a little bit about where you stand with contracts for the fourth quarter. I think you talked before about some timing of contracts benefit in Q4, and how do you look for next year?

George Zimmer - Chairman and Chief Executive Officer

Well Neill, I don't know to what level of detail you want to talk about and it's a wonderful story, so why don't you answer it?

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

Well, as we said in prior calls, we are enjoying new accounts for TwinHill. Some of these accounts are reflective of new employees uniform programs that is referred to as a reissue in the business, meaning it's a complete change out and we have a major relationship that's new to us and that's being effected in the fourth quarter and influencing our results and the impact that Twin Hill will have... as a mater of fact, the net impact of Twin Hill and MW Cleaners for the fourth quarter is approximately $0.04 versus a $0.01 loss last year. I think that's as far as we'll go with discussing the contracts but we are very happy with where we are and we are on track.

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

Okay, Thank you.

Operator

Thank you sir. The next question comes from Marc Bettinger with Stanford Group. Please go ahead with your question.

Marc Bettinger - Stanford Group Company

Hey, hi guys. George, I wanted to ask you given the economic downturn that you have been through, what do you think can be done at K&G?

George Zimmer - Chairman and Chief Executive Officer

Well, if I can honest... if I can answer that honestly, what I would have to say is that I know we're a public company but we are still in competition and I really don't think I can just broadcast what we might be doing on a telephone call. I am sure Neill can help me with that to some degree but --

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

No I agree with... Marc, I agree with George's perspective. I mean what he said earlier is that it's a business that makes up 20% of our whole; it is a profitable line of business. And we do believe there are improvements that we can pursue that are of tactical nature and merchants and George are considering what those are now. And as we move yen to next year and get to the end of the quarter, hopefully be in a position to tell you about things we might we doing but, I think that's about as far as we are prepared to go in that conversation.

George Zimmer - Chairman and Chief Executive Officer

I'll give you one decent detail though that I find interesting and that is that we opened our first K&G in California. We didn't open it because we are planning a major onslaught in California as you just heard. But we opened it in Oakland so that we will manage it from afar can now have a K&G to look at everyday if we care to on our way to work. So that we can really observe what's happening and make the appropriate corrections as quickly as possible.

Marc Bettinger - Stanford Group Company

Okay. And second question, Neill, the internal growth rate for tuxedos, is it running below what the guidance was at the beginning of the year?

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

No, we are still mid-teens at the core business, is where we are for the full year, where our expectations are.

Marc Bettinger - Stanford Group Company

Okay. I didn't know if there is some how 20%, 25% was the initial guidance?

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

I don't believe so, I have to go back and look, but my recollection is a mid-teens number.

Marc Bettinger - Stanford Group Company

Okay. And just lastly, do you think TwinHill and Dry Cleaners end up accretive for the year?

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

On a net basis, yes. I mean Clean and both of those together, yes.

Marc Bettinger - Stanford Group Company

Okay, great thank you.

Operator

Thank you, sir. The next question comes from Betty Chen with Wedbush Morgan Securities. Please go ahead with your question.

Betty Chen - Wedbush Morgan Securities

Thank you, good afternoon. I was wondering if you can talk a little bit about merchandise margin gain in Q4 and it may be going forward into 2008. I know this quarter, you were able to reap the nice benefits again and I think before in the past you had mentioned that on average you were looking for or may be I think it was 50 to 75 basis points a quarter this year. And we are just wondering if we should... could you see that in the fourth quarter and into 2008?

George Zimmer - Chairman and Chief Executive Officer

Well, I am... this year's numbers have been dramatically changed because of the After Hours acquisition. So I believe if you adjust for that, our basis point growth is 133 basis points, although that may not be exactly correct. I believe that our plans usually are to deliver 50 basis points incremental for a year.

Betty Chen - Wedbush Morgan Securities

Do you know what that would be in the core business in terms of merchandize margin gains excluding After Hours?

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

George, if I might add, the merchandize perspective for our core businesses excluding tuxedo rentals would be at a pace higher than that. And we expect that to continue for the near-term. Of course those gains end up being diluted because of the fixed cost deleverage from occupancy has resulted in lower same-store sales. But if you look at our merchandize margins, we remain confident that we continue to drive improved margins from those areas.

Betty Chen - Wedbush Morgan Securities

Okay, great. And then a quick follow-up, I think George you have mentioned that a lot of the hefty listing in terms of the integration with After Hours are primarily completed with I think you've said that a few key components outstanding. Is there any way you can clarify what those are and again it sounds like may be most of them will be completed by January?

George Zimmer - Chairman and Chief Executive Officer

Yes. I mean I have personally been involved in inculcating their store managers and executives into our culture and so I have personal direct experience that, that is going very well. I hope I am not speaking inappropriately here, but from my point of view as the CEO, most of the work has been done. But its still remains to change the names on the store fronts as the final significant act.

Betty Chen - Wedbush Morgan Securities

Great. Thank you and good luck in Q4.

Operator

Thank you. The next question comes from Brian Tunick with J.P. Morgan. Please go ahead with your question.

Evren Kopelman - JP Morgan

Hi it's Evren Kopelman for Brian. The question on the tuxedo business; first, the name change to MW Tux, could you talk about what kind of cost that will be in the SG&A line for '08?

George Zimmer - Chairman and Chief Executive Officer

Neill, I think you want to speak to that.

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

Yes, I mean in '08, we're not speaking to '08 guidance, but what I will tell you is relative to '07, the current fiscal year when we changed the name to MW Tux its primarily as George just said related to signage. So that's a capital item and then depreciation of course we would be depleting that investment as though signs are put in place and that begins in the fourth quarter, so.

Evren Kopelman - JP Morgan

Okay. And the follow up is thinking about just the growth of the tuxedo business, you said it seems to be not as impacted or differently impacted may be by the macroeconomic factors. Just curious what you think of the good longer term growth rate for the tux business? Is the mid-teen that your core business is running out right now? Is that a safe longer term growth for the tuxedo business?

George Zimmer - Chairman and Chief Executive Officer

We have just made this acquisition, so on a consolidated basis I'm not sure how to answer that question. You know up until a month ago, I would've probably said yes. But you know watching the economy unfold for the last month, I'm not sure.

Evren Kopelman - JP Morgan

Thanks.

Operator

Thank you, ma'am. The next question comes from Susan Sansbury with Miller Tabak. Please go ahead with your question.

Susan Sansbury - Miller Tabak + Co., LLC

Okay, good afternoon. Neill, to the sense that it sounds like the After Hours integration process is going to take a little longer than originally perceived. Can you talk about what the impact is going to be on the synergies that we've talked about in 2008 and are there still $15 million to $18 million?

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

Absolutely, I mean, let me be clear. I mean, the experiences we had relative to the mixed revenue and the fewer leads being derived from David's Bridal and our ability convert those is in large part a function of just integrating the two business together. We remain firmly committed as George said in his comments of the ability to realize the cost savings and we're essentially done as he said. I mean the last thing that we really need to do is the store signage and another element of that opportunity or at least that integration is our centralized call center. That's now being put in operational activity and being run parallel with some existing operations. So, we are essentially done and we feel very good about what that business' contribution can be for '08.

Susan Sansbury - Miller Tabak + Co., LLC

That's great.

George Zimmer - Chairman and Chief Executive Officer

And it is, if I might say --

Susan Sansbury - Miller Tabak + Co., LLC

Sure.

George Zimmer - Chairman and Chief Executive Officer

It is not running late, it's still going to be complete and operational by the beginning of our new fiscal year.

Susan Sansbury - Miller Tabak + Co., LLC

Okay. So come January 1st, the lights go on and it's MW Tux and we have a 1000 stores?

George Zimmer - Chairman and Chief Executive Officer

Sorry, February 1st.

Susan Sansbury - Miller Tabak + Co., LLC

Sorry, February 1st, you are right.

George Zimmer - Chairman and Chief Executive Officer

Right.

Susan Sansbury - Miller Tabak + Co., LLC

Okay. Second question, George for you is you mentioned the tailored clothing business did not turn out with the improvement in weather. Did it go down? Can you give me an idea what's going on in the tailored clothing business?

George Zimmer - Chairman and Chief Executive Officer

No, I can't, I can just tell that I didn't respond as cold weather products did.

Susan Sansbury - Miller Tabak + Co., LLC

Okay, great. Thanks so much, good luck.

Operator

Thank you, ma'am. We have a follow-up question from Lauren Levitan with Cowen and Company. Please go ahead.

Lauren Cooks Levitan - Cowen and Company

Thanks. I want to go back to something I asked earlier and that was really with respect to the underlying margin assumptions in the Q4 guidance for the legacy business excluding After Hours. If the comp guidance for Q4 for both... for all of the businesses, it's pretty consistent with the comps that you just reported in the third quarter, yet the underlying trend in EBIT margins looks to us to be down significantly versus a huge increase... a big increase in the third quarter. I am just trying to get a better understanding of what's driving that, because it sounds like you aren't talking about really using price and more markdowns as a weapon as I know in the past that hasn't really been a meaningful accelerator of your business. So, maybe you could shed some light on that and give us a sense of what we are missing?

George Zimmer - Chairman and Chief Executive Officer

Neill, do you --

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

Yes, let me... I think what may... I mean if you go back and list... and unfortunately, there is a lot of detail that I did give in the discussion about how to come up with a year-over-year comparable core excluding After Hours' performance. It's still up year-over-year, but clearly very diminished in terms of growth over the prior year quarter and the big driver is same-store sales, and it's primarily K&G. It's a function of same-store sales.

Lauren Cooks Levitan - Cowen and Company

Well, I --

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

Yes, we will not... our guidance that we gave for the full year included a much... a better same-store sales outlook for K&G. We are just now updating that outlook for the fourth quarter as it relates to our actual experience for the third quarter.

Lauren Cooks Levitan - Cowen and Company

Understood, okay. And I think we've made adjustments, and that's why we are... that's what I was referring to still seeing down year-over-year after those adjustments as opposed to a big increase in EBIT margins in Q3, where you also had a low double-digit comp decline in K&G. Could you maybe breakout the incremental sales benefit? I know you gave us the EPS benefit last year in the fourth quarter; could you give us the sales impact as well, Neill?

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

For the 53rd week, for the final week?

Lauren Cooks Levitan - Cowen and Company

Yes.

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

I don't have that in front of me. I believe it's in the $20 million range for that last week.

Lauren Cooks Levitan - Cowen and Company

Okay.

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

On a consolidated basis.

Lauren Cooks Levitan - Cowen and Company

Okay. And then as a follow-up, could you just give us some sense as to have these incremental events and differences that you've been talking about, have they already been put into place or are those things that we should be watching for over the next couple of weeks?

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

When you say events, I mean --

Lauren Cooks Levitan - Cowen and Company

Well, whatever, actually I am not sure what they are, because you said that we shouldn't look for any big change in timing or magnitude of events, but you also said there would be some change in promotional, I guess largely at K&G. So, my question is have those gone into place or is that something that we should be watching for over the next week or so?

George Zimmer - Chairman and Chief Executive Officer

Right, I understand the question. The answer is that yes, they have gone into place at K&G, but as I said earlier, it's really not going to lower margins; it's just a piece of the marketing. And specifically, at the Men's Wearhouse in the face of all the promotional activity, our sale does not begin to the public until December 17 to our 5 million private customers December 10; and so we are selling everything today at full price.

Lauren Cooks Levitan - Cowen and Company

And your comp trend is consistent with... and the core business is consistent with the quarter guidance or are you looking for it to accelerate upon the beginning of the sale?

George Zimmer - Chairman and Chief Executive Officer

I think that's got to be a no comment.

Lauren Cooks Levitan - Cowen and Company

Okay, thank you.

Operator

Thank you very much ma'am. At this time, I'd like to turn it back for management for closing remarks. Please go ahead.

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

I want to say thank you to every one for their participation today, but I also want to say and extend on behalf of George and the rest of management team at Men's Wearhouse happy holidays to everyone, and we will be speaking with you soon.

Operator

Thank you, sir. Ladies and gentlemen, this does conclude the Men's Wearhouse third quarter earnings call. You may now disconnect. Thank you for using the Teleconferencing Center.

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