The Men's Wearhouse F4Q07 (Qtr End 2/2/08) Earnings Call Transcript

The Men's Wearhouse, Inc. (MW)

F4Q07 Earnings Call

March 12, 2008 5:00 pm ET

Executives

Ken Dennard - DRG&E

George A. Zimmer - Chairman of the Board, Chief Executive Officer

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

Analysts

Lauren Cooks Levitan - Cowen and Company

Richard E. Jaffe - Stifel Nicolaus

Janet Kloppenburg - JJK Research

Betty Chen - Wedbush Morgan Securities

David M. Mann - Johnson Rice & Company

Analyst for Brian Tunick - J.P. Morgan

Marc Bettinger - Stanford Group

Presentation

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the The Men's Wearhouse fourth quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Ken Dennard of DRG&E. Please go ahead, sir.

Ken Dennard

Thank you, Eric and good afternoon and welcome to The Men's Wearhouse fourth quarter fiscal year 2007 earnings call. We’ll 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 Form 10-Q and Form 10-K.

Today’s call is copyrighted material of The Men's Wearhouse and cannot be rebroadcast without our express written consent. I would now like to turn the call over to Mr. George Zimmer, Founder, Chairman, and CEO of The Men's Wearhouse. George.

George A. Zimmer

Thanks, Ken. Good afternoon. Today, Neil and I will discuss our results for the fourth quarter of fiscal 2007, our guidance for the first quarter of fiscal 2008, and our outlook for the fiscal year 2008. In doing so, we’ll highlight our accomplishments, challenges, and most importantly our strategies and tactics going forward.

As we all know, we are facing a difficult economic environment. Certainly we are anticipating a difficult economy in the near-term but we are also preparing for the possibility of a longer period of weaker economic conditions than most economists have been predicting. We may not be in a recession based on the technical economic definition but as others have commented, and I would agree, it certainly feels like a recession based on consumer sentiment and confidence reaching record lows.

The average consumer is feeling economic pressure as they experience rising prices in fuel and basic staples, the effects of declining home prices, which for most individuals represent their single largest asset, not to mention the possibility of foreclosure on their home.

In the 35 years that we’ve been in business, we’ve experienced economic downturns both regionally and nationally. We have always said in difficult economic environments, men are generally the first to reduce spending, thus we are planning for a difficult year and we are anticipating significant reductions in discretionary spending for tailored clothing.

However, in the past during difficult economic periods, our business model was based on the vast majority of our revenues and profitability being generated by the sale of tailored apparel. Today, we also have the leading market position in North America in renting formal wear, which is a significant contributor to our operating income.

With the addition of After Hours stores, which are now operating as MW Tux stores, on an annualized basis, tuxedo rentals are expected to account for 16% of consolidated revenues. This is in contrast to the mix during the last economic downturn of less than 1%. And remember the inverse cyclicality -- tux rentals are slow in the fourth quarter when retail sales are strong.

Our results for this past fourth quarter were caused primarily by the weakness of consumer traffic levels and the pace of the slowdown, which accelerated during the quarter. Geographically, we continue to experience a heightened level of weakness in California and Florida, although broad-based weakness to varying degrees has developed across all markets.

Highlights of our business at Men's Wearhouse and Moore’s indicate a decrease in average ticket only slightly below the prior period, and we believe this was primarily a function of selling fewer tailored clothing units.

We remain focused on the fundamentals of protecting and enhancing our margins while keeping our inventory current and compelling. A reflection of that approach is clearly evident in our clothing gross margin improvement during the fourth quarter while facing a very difficult selling environment. We are watching our inventories very closely and we are comfortable with our current position.

K&G, while also experiencing traffic declines, is also being impacted by lower average tickets. However, the average number of units being purchased per transaction has improved year over year, which slightly offset the decline in average unit retails. I’ll comment more on K&G in a few minutes.

Shortly, Neil will be providing you our financial details, which as you have read today in our press release anticipates the continued weakness in business conditions. Although we are currently planning same-store sales will decrease this fiscal year in all three divisions, we remain confident in our business models.

We are monitoring our staffing levels throughout the entire organization but we are not cutting to the bone. In order to protect our number one market share in men’s tailored clothing and men’s formal wear rentals, we are prepared to spend whatever it takes within reason. Eventually the economy will recover and so will we. Therefore, we will continue to spend on employee training, benefits, and incentives. We will increase marketing to not only bring in new customers but to strengthen our brands as well.

Our balance sheet has no net debt, exactly where we want to be. We will be aggressive at the operating level and conservative at the financial level. With sufficient cash flow, what safer investment is there than our own people and brand?

I’ll now discuss some of the specifics by business unit for the year. At Men's Wearhouse stores and MW Tux, our merchandise assortments will be updated and increased to include a fashion profile that we believe will address a growing customer demographic in the 18 to 34 year old category that is increasingly visiting our stores, since we extended our footprint with the After Hours acquisition.

In addition to Wilke-Rodriguez, our private label, we will introduce two new designers. We believe that this customer may be less affected during economic recessions because they are more fashion focused. New brands and styling will be found in our suit, sport coat, slacks, shirt, and accessory categories.

From a marketing standpoint, we also recognize that there is a new generation of potential suit shoppers to introduce to the Men's Wearhouse. We will be implementing marketing initiatives that are focused on driving younger customers, both tux rental and retail, into all our Men's Wearhouse locations. We are planning to increase our marketing spend in fiscal 2008 over 2007, in spite of the cyclical downturn. It’s an opportunity for the near-term and the right strategy for the long-term. We’ll not elaborate on the specifics for competitive reasons. However, we believe we have an opportunity to grab market share. We’ll have close to 600 Men's Wearhouse stores and 525 MW Tux stores by the end of the year, with plans for more.

Specifically at MW Tux, in the last two months we have participated in almost 500 bridal shows. In the last 11 months, we have integrated approximately 500 MW Tux stores and 3,500 formerly after hour employees into our organization. We have modified tactics in lead generation and conversion, have changed systems and support, and we have rebranded the name of the stores from After Hours to MW Tux.

Changes of this nature invariably result in a temporary loss of momentum because of the dynamics involved in integrating that many stores and people within a short period of time. While the benefits of SG&A savings are being recognized, as we have previously communicated, rental revenues are increasing at a slower pace than anticipated, which we believe relate to a reduced level of leads coming from our marketing partner, David’s Bridal. In partnership with the management team at David’s Bridal, we have and are making necessary changes to the bridal registry documentation generated at David’s Bridal to reestablish the volume of qualified leads. We expect a normalizing flow of leads beginning this month, which will be reflected in earnings beginning in the third quarter.

At K&G, we now have well over 100 stores, 85% selling women’s wear. We’ve been challenged to achieve operating goals and targets this past year. In fiscal 2007, K&G experienced an 11% comparable store sales decline yet was able to retain mid-single-digit EBIT margins, a respectable level of profitability but under plan and under prior year levels. While it is clear that an element of that under-performance is externally driven, we believe we can do a better job at the store level to reestablish a high-single-digit EBIT margin.

Effective for fiscal 2008, we have realigned accountability of operations by eliminating the divisional president position and retasking to existing personnel that have had extensive operating experience at The Men's Wearhouse. We will be taking an open-minded but critical view of our four-wall activity, including become more customer-centric, improving store designs and layout, increasing our selections of designer and branded product, particularly in women’s wear, while keeping inventory current and compelling and improving our regional and store-specific assortments.

We do not expect to make changes over night or to immediately realize significant benefits from our changes because of the current economic climate. Our expectation over the next 12 months is to achieve stabilization and strengthen the platform for the future.

In Canada, a tough economic environment often requires making some very difficult decisions. Last week we made such a decision when we gave notice to our employees involved in our manufacturing facility in Montreal, Canada, that we must now close that factory in mid 2008, approximately one year earlier than we had originally anticipated. We realized that our costs to manufacture product in Canada are significantly impacted due to the improving Canadian dollar and the inability to compete with the lower costs in other parts of the world.

Our historical perspective when the economy was more robust was to defer the closing of this facility until mid-2009, as we approached the lease expiration of this facility. However, given the slow-down in the U.S. economy and the softness in our projected outlook in fiscal 2008, coupled with a softening in the Canadian marketplace, compounded with a declining value of the U.S. dollar to the Canadian dollar, we believe we have no choice but to accelerate this closing.

This is a very difficult decision and it is not taken lightly, particularly given our cultural concern for our employees’ welfare. We are currently planning on offering severance packages to all employees involved in the plant closing, including job training, even to employees who are part of a collective bargaining agreement that does not require such severance payments. We believe it is the right thing to do and we hope the union appreciates the gesture.

Although it would cost $0.01 to $0.02 per share, the all-in estimated pretax costs to close the facility are approximately $8.5 million and will be incurred over the next three quarters. Our 18,000 employees who are not losing their jobs notice how we handle difficult problems with others. This creates meaning and a greater employee buy-in.

Twin Hill, our B2B uniform program, while are smallest business initiative in terms of revenue, is our fastest growing profit initiative, having nearly tripled the level of volume in fiscal 2007 over 2006. Although this pace of growth is difficult to replicate and sustain in the near-term, we do believe that an annualized growth rate in the 25% plus range is achievable, particularly because we just completed the rollout of a new program for 16,000 U.S. Airways flight attendants and customer service employees worldwide. A veteran flight attendant with U.S. Airways has told us that the extra care undertaken to determine a proper uniform fit resulted in the best fitting uniform she has worn in her 35-year career. We have always done well with men. It’s nice to hear the same from women.

I have confidence that Twin Hill will grow this business meaningfully over the next five years with quality win-wins, such as the one with U.S. Airways.

MW Cleaners, another small and developing business unit addressing the retail dry cleaning market, continues to realize efficiency gains as we further explore the ability to leverage this environmentally friendly business and consider regional growth potential in what is clearly the future of dry cleaning because of increasing environmental concerns.

We’ve had one significant management change previously announced. Our President, Charlie [Bressler], my friend of 50 years, is voluntarily stepping down to Executive Vice President of Marketing and Human Resources. Doug Ewert, our Chief Operating Officer, will also carry the title of President. Because Doug came out of merchandising and is almost 15 years younger, the company is better positioned for the long-term. We continue to have a strong bench.

That’s the framework of our plans for 2008. I’ll now turn the call over to Neil to review the details of our recently completed fourth quarter and our outlook for fiscal 2008.

Neill P. Davis

Thanks, George and good afternoon, everyone. Fourth quarter earnings per share of $0.28 was sharply higher than our most recent guidance of $0.16 to $0.18, yet well below our initial guidance for the quarter of $0.43 to $0.48. Weak comparable store sales results for the quarter, as outlined in our release today, which are largely driven by weak traffic levels, was the key driver to our being below our initial expectations. The principal drivers to the upside from our mid-quarter EPS update stem from several factors. Specifically, modestly better than expected sales results in January, lower cost of clothing sales, lower general and administrative costs, and lastly a lower effective tax rate than expected.

While profitability for the quarter was clearly impacted by the decline in comparable store sales and expense deleveraged thereof, I should reiterate that that deleverage was amplified by the seasonality of the tuxedo rental business and the acquisition of the tuxedo rental operations of After Hours earlier in the fiscal year heightened the magnitude of the deleverage when compared to the prior year quarter.

The inclusion of those operations resulted in a $0.37 dilutive impact to the current year fourth quarter diluted earnings per share. The fourth quarter of this year also includes a $0.02 dilutive impact for costs associated with the relocation of the company’s corporate offices in Houston as well as the effect of our current year adoption of accounting for sabbatical leave and other similar benefits pursuant to FAS-43, both of which we have discussed in prior year calls, or prior quarter calls, rather.

Finally, I want to remind you that the comparability of this year’s quarter to last year’s was impacted by the additional week in the retail calendar and last year’s fourth quarter that generated $0.08 in diluted earnings per share, as well as favorable discrete tax items that resulted in $0.09 of diluted earnings per share.

Adjusting our reported results for these unusual items, diluted earnings per share for the fourth quarter of 2007 were $0.67 compared to a comparable fourth quarter in fiscal 2006 of $0.78.

On a comparable 52-week basis for the prior year, total sales for the quarter decreased 1.9% to $535 million. Tuxedo rental revenues, representing 6.5% of total sales in the quarter, increased 141.9%, which is largely influenced by the addition of After Hours. Tuxedo rental revenues excluding After Hours increased 9.1%.

Comparable store sales for the quarter decreased 8.6% for our United States based stores, which was below our initial expectations of negative low single digit. This performance versus plan is a reflection of weaker traffic. Comparable store sales decreased 7.3% for the company’s Canadian based stores for the quarter and was below our initial guidance of flat to up 2%. As in the U.S., our Canadian clothing business was impacted by reduced traffic trends as well.

Gross margin as a percentage of sales decreased 183 basis points from 44.6% to 42.77%. Excluding the impact of After Hours and the 53rd week in the fiscal 2000 quarter, gross profit as a percentage of sales increased 8 basis points over the prior year. Continued improvements in lowering our cost of clothing sales, effective inventory management within the context of weaker consumer traffic trends, and continued growth of tuxedo rentals mitigated the impact of occupancy deleverage.

Selling, general, and administrative expenses as a percent of sales increased 728 basis points from 31.46% to 38.74%. Again, excluding the impact of After Hours, the 53rd week in fiscal 2006, the corporate office move and the sabbatical costs, SG&A had 294 basis points of expense deleverage and that clearly relates to comparable store sales decreases in the U.S. and Canada that I mentioned previously.

Weighted average diluted shares outstanding of 52.7 million were 4% or 2.1 million shares less than the fourth quarter of the prior year. We repurchased 1.2 million shares in the quarter at a value of $27.7 million, or the equivalent of $23 per share.

Retail inventories on a per store basis at The Men's Wearhouse stores increased 3.6%, K&G decreased 8.9%, and Moore’s in Canadian dollars decreased 3.7% over the prior year. Inventories at our Twin Hill business unit increased 79% over the prior year and relate to the ramp-up of a new uniform program that George just mentioned for U.S. Airways’ approximate 16,000 employees.

That covers the highlights of the fourth quarter that we wanted to get across today. I now will turn your attention to our outlook for fiscal 2008. The weakening economy is clearly having an impact on our business and to varying degrees amongst our retail brands. In addition, the timing of the acquisition of After Hours in the prior fiscal year will cause distortion in year-over-year comparability. Specifically, After Hours was acquired in April 2007, which means that fiscal 2007’s 10 month of operations will be compared to a full 12 months of operation in fiscal 2007 and impacting the first quarter.

Given the challenges these factors will create for the investment community and interpreting and evaluating our performance, we are providing additional forward guidance today -- not less, as many in our industry are inclined to do.

Specifically, we will expand our quarterly outlook to include a perspective of the second quarter in addition to our traditional practice of the first quarter.

In an effort to understand our future trends we as a company, and many I believe on this call as well, particularly based on the numerous interviews I have entertained over the past year, have attempted to look backwards to past experiences and extrapolate those forward. While many elements of macroeconomic weakness are difficult to interpret from one cyclical trough to the next, what is clear and [replicable] from the past to today is, as George mentioned earlier, that men are generally the first to reduce spending in the average household during periods of economic stress and we feel those effects more acutely than the broader men’s industry averages, as our business model is tailor clothing dominant, and particularly in a single category, suits.

The dominance was more concentrated in the last downturn and as a result, the pressure on our top line was more pronounced due to the weak employment environment, which was exaggerated with the more casual dress code of the day. As the economy improved then, we clearly benefited from the stronger employment trends and a more dressed-up fashion cycle.

As it concerns our core retail brand at Men's Wearhouse, from the peak of the last cycle, which was fiscal 2000, we experienced a 24-month period of declining sales trends, which was followed by a four-year up-trend before peaking once again. The current cyclical peak appears to have been November 2006. Therefore, by historical standards, we are now more than halfway through the current cyclical downturn. It is on that basis that we have developed our sales outlook for the current year. While we have moderate visibility in the slope of the current cyclical downturn, the duration is clearly more difficult to project.

That said, for the full year we are currently estimating comparable store sales for our Men's Wearhouse brand to decrease in the low to mid single digit range; for K&G to decrease in the high single digit range; and Moore’s to essentially be flat.

The first half of fiscal 2008 is expected to be weaker than the second half, primarily as we begin to anniversary weak prior period comparisons.

Comparable store sales for the first quarter of fiscal 2008 for The Men's Wearhouse brand are expected to decrease in the mid single digit range; for K&G to decrease in the low teens, and Moore’s to decrease in the low single digits.

For the second quarter of the year, we estimate The Men's Wearhouse brand to decrease in the low to mid single digit range; for K&G to continue experiencing pressure and decreasing in the low teens; and Moore’s to increase in the low single digit range.

I want to remind everyone that comparable store sales expectations for the first quarter exclude the MW Tux stores, meaning the legacy operations of After Hours. Those will not be included in the comp base until the second quarter and will be reflected in our reporting of The Men's Wearhouse comparable store sales.

In addition and for the reasons George cited in his remarks, we are planning for weaker tux rental revenues from the legacy After Hours stores in the first half of the year, followed by a stronger second half. I would also highlight that that implies a stronger first half of fiscal 2009 as we anniversary the impact of revenues of our integration activities.

As George commented in his remarks, we are taking an initial operating [inaudible] to [reflect on the] capacities we have to further grow our businesses. That means approaching this environment offensively and that means making investments and decisions in the areas of our business that will drive market share and enhance shareholder value.

In this economic environment, we expect to have an opportunity to procure certain product brands and as a result, we’ll be increasing our selections of designer and branded products for some of our retail store concepts, particularly K&G.

We do anticipate a continuation of increases year over year in maintained merchandise margins, albeit at a slower pace than in the past several years. In addition, a greater allocation of operating capital to marketing initiatives is a top priority.

Fixed capital investments in the range of $70 million to $75 million are planned and are in support of a store upgrade and expansion program involving the opening of 51 stores. It also includes major upgrades, which means relocations or remodels or expansions that would involve 128 of our stores. It also includes minor upgrades and refreshes to an additional 168 stores, as well as upgrades and enhancements to distribution of technology infrastructure. Funding of these initiatives are planned to be derived from internally generated cash flow.

While our operating plan to guidance lead to meaningful free cash flow, our forward guidance does not include any share repurchases. However, that does not mean we will not continue to pursue our outstanding repurchase authorization as conditions warrant.

We want to make mention of several items impacting the quarter over quarter and year-over-year comparability of our guidance for earnings per share. As George mentioned earlier, we will incur an estimated $8.5 million pretax charge to close our manufacturing facility located in Montreal. This consists primarily of severance costs, write-off of fixed assets, lease termination payments, and costs to finalize the clean-up and closing of the facility. We also estimate that approximately $7.3 million of this charge will result in cash expenditures.

The estimated pretax costs are expected to flow as follows: $5.5 million or the equivalent of $0.06 per share in the first quarter; $1.3 million pretax costs, or the equivalent of $0.02 per share in the second quarter; and lastly, $1.7 million pretax, or the equivalent of $0.02 per share for the third quarter.

Economic benefits from this action are not expected to be realized until fiscal 2009, as replacement production from lower cost venues begins to flow into store inventory. The exact level of improvement is unclear at the present time as we have not fully developed our buy plans for fiscal 2009.

As we indicated in our press release today, After Hours was acquired at the beginning of April 2007. Thus, February and March, which are considered off season, were not included in the first quarter fiscal 2007 results. For February and March, the earnings per share impact on the first quarter of fiscal 2008 are estimated at a dilutive $0.22.

In fiscal 2007, the start of the company’s fiscal calendar was later than in the prior fiscal period because of the prior year’s 53rd week. This late start means the seasonal peak period, fiscal month of May for the company’s tuxedo rental business shifted one week earlier in the fiscal calendar and therefore benefited the company’s first quarter at the expense of the second quarter in the prior year. We estimate the impact of this shift to be approximately $0.04 in the first quarter of the prior year.

To recap before we open the call to your questions, for the first quarter we are estimating diluted earnings per share excluding the closing of the Golden Brand facility, in a range of $0.20 to $0.24, for the second quarter in a range of $0.80 to $0.86, and for the full year in a range of $1.90 to $2.10.

And with that, Operator, we will now open up the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Lauren Levitan with Cowen and Company. Please go ahead.

Lauren Cooks Levitan - Cowen and Company

Thanks. Good afternoon. I have a couple of questions; first, when I look at the guidance for the first quarter specifically, understand what you are seeing in the trend and how you are reflecting that, but it looks to us like you are assuming a significantly greater decline in EBIT margin for the legacy business, meaning excluding the After Hours, than what you experienced in Q4 on a year-over-year basis, and I’m hoping you can give us some sense as to why that would be what the drivers of much bigger erosion in that part of the business would be.

And then separately on the Tuxedo side, understand the seasonality and the shift there. I’m hoping you can give us some understanding though of -- if you could quantify that slower revenue growth rate that you are seeing in tuxedo. Does that mean -- are you looking for any revenue growth in the April and second quarter period year over year? Or have some of these transition issues concluded you to believe that that would be flat to down and if so, if you can just give us a little better understanding of what these transition issues are. Thank you.

Neill P. Davis

As to the first question, there is nothing in our outlook in 2008 that suggested that our core legacy business’ operating margin profile is down. So there must be some comparability issues that are clouding at least what you are initially looking at and we’ll have to dialog that offline, but there is nothing that is suggestive of our business declining other than weak same-store sales, which is deleveraging the business. We do expect to have our gross margins that are derived from product margin to be up over the year, as it has been in the past but as I said on the call earlier, it will begin to moderate. Therefore, the only other dynamic that’s at play here really is the degree of same-store sale decline and the effects that it’s having on the expense deleverage. And also remember the comment that George made, that we are spending more money in advertising, which is different from what was done in the prior cycle. When we had a compression in same-store sales, we retreated from advertising. We are choosing a different path this time.

And I will answer that second question, and George, if you wanted to add to that, you can but the first half of the year we expect our tuxedo rentals from the legacy operations to be down. We expect them to be up in the back half and the implication then is flat year over year, and that is primarily due to the transitional issues that George talked about, which we believe are now behind us and we’re really excited about what the potential is as we move through this timeframe.

George A. Zimmer

Historically the tux rental business has always been a big second and third quarter and a soft fourth and first quarter, so I thought it was running about that.

Operator

(Operator Instructions) Our next question comes from Richard Jaffe with Stifel Nicolaus. Please go ahead.

Richard E. Jaffe - Stifel Nicolaus

Thanks very much, guys. I guess a couple of follow-on questions about the comments made about the opportunity in the young men space. You mentioned additional brands and I recognize that maybe not sharing those with us is a competitive issue, but could you give us a better sense of sort of the young man’s initiative, either in broad terms or merchandise categories? And then if you could talk a little bit about your outlook for K&G and initiatives to get that business back on track.

George A. Zimmer

Well, I’ll mention a brand other than Wilke-Rodriguez, our own, is Jones New York City is the young men’s brand. You know, young men’s is a -- flat-front pants, that’s one of the significant changes from the clothing you and I wear, and higher armholes, snugger fits, smaller shoulders. So it’s definitely a different look.

Operator

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

Janet Kloppenburg - JJK Research

George, did you say something about the divisional management changing at K&G? And also, could you talk a little bit about the marketing increase? Is most of that coming at K&G? And in this year, when you think about K&G's progress throughout the year, would we look for them -- would we look for sales to turn positive in the back half, or did you say that we should look for comps to be negative all year long?

George A. Zimmer

Let me take them backwards, Janet; comps will be negative all year long, although improving, we hope. What was that second question again?

Neill P. Davis

Specifics of what we’re focused in on on dealing with that issue -- some of the plans relative to the four-wall, et cetera.

George A. Zimmer

Well, we’ve hired a design team. We’ve actually let the president of the division go and replace him, although he’s not being titled the president, with a 17-year Men's Wearhouse veteran. We’re bringing a new chief merchandising officer. We are bringing in more designer and famous brands, particularly in our women’s wear section. We’ve got a whole grocery list of plans but as you know, these plans are all going to take place during the year so their impact this year will be de minimis and it’s really as I said in the call, setting us up for the future.

Operator

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

Betty Chen - Wedbush Morgan Securities

Thank you. Good afternoon. I was wondering if you can talk a little bit about the marketing spend that you plan on making, which medium and it seems to me that you’ve already been making some advertising targeting a younger demographic. Are there some early learnings from that that you are leveraging on the expanded marketing spend in 2008? And are there levers for you to flex in case it doesn’t give you the kind of return you expect? Thank you.

George A. Zimmer

For the first time in many years, we’re actually going to raise the percentage on a consolidated basis that we spend in advertising. We are not going to spend more at K&G specifically. We are spending more at Men's Wearhouse and Men's Wearhouse Tux, and in our Internet advertising targeted to the younger customer.

Operator

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

David M. Mann - Johnson Rice & Company

Thank you. First of all, thanks for the information in the expanded guidance. It is I think appreciated by your shareholders. Can you talk a little bit about what happened in Canada in the fourth quarter and why you would expect that business to rebound so quickly? And then also, if you could comment on the higher inventory levels at the Men's Wearhouse business and why that’s perhaps not a cause for concern for future [margins]? Thank you.

George A. Zimmer

My feeling on the precipitous drop in Canada, which was a shock to everybody concerned, is that it must have been triggered to some degree by a general sense in Canada that as the dollar, the Canadian dollar strengthened and retail prices were not adjusted, they sort of rebelled against shopping in retail stores and our business was stronger, meaning Men's Wearhouse business, along the northern tier as Canadians came into the United States.

Also, our business for this year I believe Neill’s numbers indicated the negative is reduced as we go through the year, so it’s still tough and it’s just going to get less tough as the year goes on.

The inventory number or question, maybe Neill will take that.

Neill P. Davis

Yeah, it’s -- what I had indicated in my remarks is that it’s up like 3.6% on a per store basis at Men's Wearhouse and that’s in contrast to our negative same-store sales. David, what you are seeing is the flow of goods coming in and hitting our warehouse in anticipation of our spring selling season. And we are [inaudible] to a certain degree some of our clothing inventories at Men's Wearhouse, so it’s essentially a timing difference. And if you had taken out work in process of the calculation, you would see a much more muted pace of inventories and actually at the store level, they are flat to slightly down. So it’s a ramp in anticipation of our seasonal peak in the first half of the year.

Operator

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

Analyst for Brian Tunick - J.P. Morgan

Good afternoon. It’s [Fran Kopelman] for Brian. Questions about the After Hours business. So the first part of the question is you said in 2007, After Hours was about $0.02 accretive to the year and that was 10 months, right, not the 12 months? So if you could talk about what the impact you expect in ’08 is.

And then the second part is maybe looking longer term, our understanding was that tux rentals in the Men's Wearhouse stores were about a maybe 30% to 40% contribution margin to the business and our understanding is that After Hours was around the mid single digit EBIT margin when you acquired them. So can you talk about what the potential margin could be for After Hours, given cost savings and synergies and other opportunities like that?

Neill P. Davis

Well, a couple of things; tuxedo rentals is not a segmentable, separate, identifiable line of business. It is yet again only another service that we are offering to our employees. Now we’re doing it to a thousand store fronts as opposed to 500. So our ability to continue to give you the kind of visibility we have in the past relative to After Hours has become much more diluted because we’ve integrated the two businesses. For example, the distribution centers that we now have supporting this business that we acquired from After Hours are also supporting the Men's Wearhouse stores. So it is impossible to disaggregate our business and therefore give you the same kind of visibility we did last year.

And just to put it in perspective, the reason we did that last year is because it was an acquisition and we pulled it apart so you could better evaluate our ongoing legacy core businesses. So I would tell you that you need to be thinking about top line volume and how we grow that business and therefore its impact on the overall profitability results of the company.

I mean, that’s how I would respond to the question on tuxedo rentals. We’re very excited about what it’s all meaning for our company. We have a significant leadership position in it and the energy that we feel from the stores and as George just mentioned a minute ago about the initial experience we are getting at the bridal fairs going into the year is exceptional.

George, do you want to --

George A. Zimmer

You know, we’ve spent a lot of time, I’ve spent a lot of time personally talking to the 3,500 people that we’ve just acquired from After Hours to inculcate them in our culture, which some would say is what makes us unique. In my opinion, we have done a great job at doing that and it’s going to start to pay dividends towards the second half of this year and then even more so in ’09 and beyond.

Operator

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

Marc Bettinger - Stanford Group

Thanks, guys. Neill, can you talk about private label and direct sourcing, where you are now and where the opportunity for ’08 is?

Neill P. Davis

No, I really don’t want to get into a dialog of the specificity of how we are merchandising our stores from one brand to the next. What we have communicated in the past is that we are increasing our penetrations or private label as it relates to branded, but with the opportunities we have with the dislocation of the economy and our continued ability to acquire and grow our business, we have an opportunity with additional brands and designer brands and we are going to build that up this year. And even as we build up a branded piece of our portfolio, we still anticipate to be able to drive our merchandise margins. And as I said earlier, unfortunately not at the same pace as it has been in the past, but we feel good about where we are today with Canada and with our core business and we want to take a little more of a branded point of view relative to K&G.

George A. Zimmer

And I would just add that the opportunity to get more designer and branded goods at attractive prices doesn’t mean that we’ve decided what we are going to sell them for, so that it may have a positive or slightly positive or slightly negative impact on margin but it’s still within our control.

Operator

(Operator Instructions) Our next question is a follow-up from Laura Levitan. Please go ahead.

Lauren Cooks Levitan - Cowen and Company

Thank you. I wanted to go back to what you both, George and Neill, said about the tuxedo trend. I guess I’m trying to isolate how you are able to tell that the slower top line for tuxedo rental is a function of integration issues as opposed to maybe some macro factors catching up with the tuxedo business, which we’ve historically thought was not really facing that. Are you -- and so I guess my question is are you seeing a difference in terms of the bookings in the units that used to be After Hours versus those that used to be Men's Wearhouse stores? Is that what gives you confidence that the driver of the weakness is not macro and rather specific to the integration issues?

Neill P. Davis

The driver to the softness is clearly integration related and it’s directly related to leads that we are given and accumulates in David’s Bridal. And we’ve had some operational issues. As we break that apart from the previous owner and embed it into a new owner, we’ve had some miscues. And because of the long lead time with the rental business for the wedding aspect, we’re feeling the effects of those things that happened last year and we believe that we’ve concluded those now but we are going to realize those into the first half of this year.

The reason we take a point of view of having improvements in the back half of the year is because we do have visibility as to what these reservations are now, with greater specificity and clarity because I can now see the forward reservation rates and they are beginning to build in a rather significant way as we move through some of these initial integration issues. So we are very comfortable this is not a fundamental macro line of business type issue. It does really relate to the integration efforts.

Operator

Our next question is a follow-up from Mr. Jaffe. Please go ahead.

Richard E. Jaffe - Stifel Nicolaus

Thanks very much, guys. Neill, if you could just spend a second on Twin Hill, I know that business has been very -- grows very erratically and you said it obviously won’t grow at that 3X rate going forward, but is the 25% based on anything you see on the horizon or just sort of a more conservative outlook, or is there more in the pipeline in terms of contracts?

Neill P. Davis

There is more and I will tell you the 25% growth rate is growing off of our existing client base and book of business. I mean, once we get a client, new relationship and a particular program doesn’t mean that’s all we are going to get. There are a number of relationships we have with Twin Hill that for the companies that have multiple uniform programs and as we develop these new relationships, we’re having opportunities to further expand and deepen our relationships and that’s generally what’s wrapped around the 25% growth rate that George talked about a moment ago. You bet. We have a pipeline of business that if our sales team is successful, we can convert and create more volume. So it’s -- the growth rate that we’ve identified is off an existing base. It’s a little more problematic to try to forecast conversion rates of a prospect list, but they clearly are there.

George A. Zimmer

And Richard, the key word is meaningful, that we said earlier. I mean, we are a $2 billion company and we expect Twin Hill to become meaningful.

Operator

Our next question is a follow-up from Janet Kloppenburg. Please go ahead.

Janet Kloppenburg - JJK Research

If we could just talk about the referral business at After Hours one more time. So this is a problem -- I think the expectations or the trouble began I think in the third quarter of ’07. Do we have validation that there the referral rate prior to you acquiring the company is higher than it is now? Could it be that you just built in a number that -- you built in an estimate for that revenue line that may have been higher than it should have been?

Neill P. Davis

You know, Janet, I don’t -- I mean, when you acquire a company that doesn’t have historical point of view and reference to forecast off of, sometimes you might have some inconsistencies with that. But as it relates to this dynamic, we’ve had two operational challenges through the integrations relates to these leads and we have addressed both of those.

The first challenge occurred not too long after we acquired the business, summer time frame, and the second one occurred toward the end of this past fourth quarter. And it’s hard to identify those things until they manifest and develop and we see that literally in the results and therefore be able to react to them.

George A. Zimmer

And the results are starting to pick up significantly. That’s all we can say at this time.

Neill P. Davis

It’s a timing thing and I -- you know, there’s nothing that gives us pause of a fundamental issue with the rental business in the U.S.

Operator

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

David M. Mann - Johnson Rice & Company

Thank you. My question relates to your suit pricing. Can you talk a little bit about the performance of the semi-annual sale in terms of price points, and also what your approach to the future is on any change in pricing, especially given that it seems like your main specialty competitor keeps getting more and more promotional and seems to have broken down below your $200 price point.

George A. Zimmer

Well you know, I don’t have those numbers in front of me. The best I can say is that there has been no startling change from prior years or historical performance. There does at Men's Wearhouse continue this ever-slow reduction in tailored clothing that has been going on for a quarter of a century. At K&G, we’re actually not seeing that. They sell really just suits and not much of the rest of the category.

I really don’t see anything dramatic. Neill, is there something --

Neill P. Davis

David, we haven’t seen any breakdown in the sell-through of our good, better, best pricing strategy, from the $200 price point up to the $500 price point. They are intact. Our mix is the same, our sell-through is the same, so relative to that example you gave, we don’t see that occurring.

Operator

Our next question is a follow-up from Brain Tunick. Please go ahead.

Analyst for Brian Tunick - J.P. Morgan

Thanks, a quick one; what was your occupancy expense in the fourth quarter?

Neill P. Davis

In dollar terms or in percentage terms?

Analyst for Brian Tunick - J.P. Morgan

Dollar terms, if you have that.

Neill P. Davis

I don’t have that on the top of my head. If you would call later, I’m sure that’s something we can get to you. That’s part of our filings.

Analyst for Brian Tunick - J.P. Morgan

Thank you.

Operator

Our next question is a follow-up from Marc Bettinger. Please go ahead.

Marc Bettinger - Stanford Group

Neill, do you expect any change in average pricing in 2008? And the 18 to 34-year old age range, what percent of the business is it now and where do you think it’s going?

Neill P. Davis

George, you can add -- I think relative to pricing, even if we did, I don’t think I’d be telling you on this call for competitive reasons. I mean, we are always taking the point of view of pricing the product in a manner that yields the best gross margin expansion, so it’s in concert with the selling organization, with what Doug and his merch team believe that they can drive the best gross margin dollars.

George A. Zimmer

You know, I don’t want to get into too much of the details of the thinking that goes on here for competitive reasons. You know, you are going to start to see on television some young, hot looking guys in our TV commercials. You know, let’s leave it at that.

Neill P. Davis

I’ll just add one more comment about the question on that demographic; this is not something that’s going to change overnight in a significant way. I mean, it is clear that the younger consumer, that 18 to 34 year old consumer, its participation in the population database is increasing and we recognize that happening and we have a unique opportunity, along with our tuxedo rental business, to capitalize on this trend that will manifest over a longer period of time, the next 10 to 15 years.

George A. Zimmer

I believe we have proven the fact that we can hold our current customer without incremental increases in advertising. We’ve proven that over 15 years that we’ve been public, which gives us the ability to spend more of our money going after a new demographic without really sacrificing the existing customer. That’s not just opinion but that I believe is something that has been documented in the advertising world.

Operator

At this time, I am showing no further questions in the queue. I would like to turn the call back over to management for their concluding remarks.

Ken Dennard

We appreciate everyone’s time and attention today and we look forward to talking with you on our next call.

George A. Zimmer

And I’d like to thank the employees and customers, not to mention the shareholders, for having confidence in this company during tough times.

Operator

Ladies and gentlemen, this does conclude The Men's Wearhouse fourth quarter earnings conference call. You may now disconnect and ACT would like to thank you for participating in today’s call.

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