The Men's Wearhouse Management Discusses Q2 2012 Results - Earnings Call Transcript

| About: Tailored Brands, (TLRD)

The Men's Wearhouse (MW) Q2 2012 Earnings Call September 6, 2012 9:00 AM ET

Executives

Ken Dennard - Founder and Managing Partner

George A. Zimmer - Co-Founder and Executive Chairman

Diana M. Wilson - Interim Chief Financial Officer, Executive Vice President and Treasurer

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

Analysts

Brian J. Tunick - JP Morgan Chase & Co, Research Division

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

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

Janet Kloppenburg

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

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

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

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

Susan R. Sansbury - Miller Tabak + Co., LLC, Research Division

Bruce M. Zessar - Advisory Research Holdings, Inc.

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Men's Wearhouse Second Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded today, September 6, 2012. I would now like to turn the conference over to Ken Dennard of DRG&L. Please go ahead, sir.

Ken Dennard

Thank you, Erin, and good morning, everyone. We appreciate you joining us early here for the Men's Wearhouse conference call to review 2012 second quarter results and the company's outlook. We'd also like to welcome our Internet participants listening to the call, as it is being obviously webcast. Before I turn the call to management, I have a few housekeeping details to run through. For those of you who didn't receive an e-mail of the earnings release yesterday afternoon from me and would like to be added to that list, you can contact me or my offices, DRG&L. That number is (713) 529-6600, and you can find our -- the contact information or you could e-mail me at ken@dennard.com.

There'll also be a replay of today's call available via webcast on the company's website, which is, of course, menswearhouse.com in the Investor Relations section. Plus there'll be a recorded replay available by phone, which will be available for week, and that information is in yesterday's release.

Please note that the information reported on this call speaks only as of today, September 6, 2012, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening. In addition, the comments made by the management of Men's Wearhouse today during this conference call may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of management of Men's Wearhouse, however, various risks, uncertainties and contingencies could cause actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener is encouraged to read the company's annual report on Form 10-K, its quarterly reports on Form 10-Q or -- and current reports on Form 8-K to understand certain of those risks, uncertainties and contingencies.

And now with that all being said, I'd like to turn the call over to Men's Wearhouse founder and Executive Chairman, George Zimmer. George.

George A. Zimmer

Thanks, Ken, and good morning. On our last quarterly call, we reaffirmed our annual guidance of $2.70 to $2.78 earnings per share. Today, we're raising our annual guidance to $2.74 to $2.80, and later in the call, Diana Wilson, our Interim CFO, will talk about both the financial results and outlook. Obviously, there's a difference in how the Street and the company anticipate quarterly estimates. The simple answer is this: As we close unproductive tuxedo rental stores, our productivity and profitability rises in the fourth quarter. In fact, this year, our fourth quarter will be positive. And although we understand that a mid-single-digit comp increase this year at Men's Wearhouse stores is not last year's double-digit increase, we feel it's a good number considering overall macroeconomic conditions and the fact that we are comparing against such a favorable increase last year. Not only is our comp good at Men's Wearhouse stores, but at Moores stores as well. That makes sense because we run Moores like an extension of Men's Wearhouse.

And finally, we've launched the new television campaign at the end of the first quarter, which appears to be effective. It's simple. Me, driving around downtown, passing a lot of young, hip, and even tattooed customers promoting modern fit clothing, which Doug will comment on during his remarks.

During our last call, it was too early to judge the new campaign, but now we are excited about it. This is the umbrella marketing strategy covering television and social media for Men's Wearhouse, Men's Wearhouse and Tux, and Moores stores, which represent over 75% of the total company volume.

Before hearing from Doug Ewert, our CEO, let me introduce our Interim CFO, Diana Wilson. Diana began her career in public accounting, working with our Vice Chairman David Edwab, before joining Men's Wearhouse. Diana has been with Men's Wearhouse for 13 years and has been looking at our financial statements for longer than that. Certainly, we all wish Neill well in his new job at Francesca's. And I'm sure you will appreciate Diana's accounting background and attention to detail as reflected in her career path from Chief Accounting Officer to her new position as Interim CFO. Diana?

Diana M. Wilson

Thanks, George, and good morning, everyone. We hope you've had a chance to review the information in the press release we issued yesterday evening. We have come to realize that there hasn't always been enough time to study our results before the conference call, so we've revised our earnings release and conference call schedule. We believe this will improve the quarterly reporting process and will provide our shareholders, analysts and others that follow us more time to digest our results before we have our conference call. And we plan to make our comments more focused on the performance of our retail segment brand, as well as our Corporate Apparel segment to provide better insight into our consolidated results.

Let's take a look at the results for the second quarter, which had been reported in our Form 10-Q filed earlier this morning. Diluted earnings per share was $1.15, better than our adjusted diluted earnings per share of $1.11 in the same period last year and better than our $1.12 to $1.13 guidance for this year's second quarter. The increased earnings came mainly from our market-leading retail segment, which contributed incremental sales of $18.7 million or 3.2% higher than last year's second quarter and incremental gross margin of $10.7 million. In our less significant Corporate Apparel segment, second quarter sales declined $11.9 million, which was anticipated because of year-over-year changes by our customers in their planned uniform program launch dates. On a consolidated basis, our sales came in as we expected with a 1% increase over last year's second quarter.

In our retail segment, our flagship brand Men's Wearhouse stores represented 65% of our total 2012 second quarter sales, while our Moores stores in Canada contributed another 12%. In this highly promotional and very challenging economic environment, both brands delivered increased comparable store sales in the second quarter, 4.4% at Men's Wearhouse and 2.5% at Moores, driven mainly by increased average unit retails and by increased tuxedo rental revenues, which had a second quarter comp sales increase of 4.3% in the U.S.

At K&G, which was 14% of our total 2012 second quarter sales, we had a decrease of 3.3% in comparable sales. We believe that the spending power of our customers for this brand continues to be constrained by our low growth economy. However, K&G will, again, make a positive contribution to our operating profit and at a higher annual amount than last year.

In total, as I just noted, our retail segment sales increased $18.7 million over last year's second quarter, and the retail segment gross margin increased $10.7 million. The gross margin performance was also better than our guidance due to favorable clothing product, tuxedo rental and alterations margins. Doug will provide more insights into the merchandising, marketing and new customers that are driving these results in his comments.

For fiscal 2012, as George said, we're raising our annual guidance by the $0.02 we gained in the second quarter and tightening our range to $2.74 to $2.80. I will briefly review the guidance, but for details regarding our full year, third quarter and fourth quarter expectations, I refer you to the press release we issued last evening.

For the third quarter, diluted earnings per share is planned in a range of $0.95 to $0.98, an increase of 20% to 24% over the prior year's adjusted diluted EPS of $0.79. For the fourth quarter, which will include the extra 53rd week in fiscal 2012, diluted EPS is expected in a range of $0.12 to $0.15 compared to a prior year fourth quarter adjusted loss per share of $0.05. Diluted earnings per share from the extra week are estimated at $0.02.

Based on our promotional calendars and the expected continued effectiveness of our marketing, merchandising and tuxedo rental strategies, comparable store sales increases are planned for Men's Wearhouse and Moores in both quarters, high single-digit increases for Men's Wearhouse and Moores in the third quarter and 3% to 4% increases for each brand in the fourth quarter. Tuxedo rental comp sales in the U.S. are also expected to increase in both quarters, with a third digit -- third -- I'm sorry, a third quarter increase of 10% to 11% and a fourth quarter increase of 1% to 2%. The absence in the current year of a popular event date, like 11/11/11 last year, is contributing to the higher tuxedo comp sales increase planned for the -- this year's third quarter and the relatively lower comp increase planned for the fourth quarter.

For K&G, a flat to negative 1% comp in the third quarter and a 1% to 2% positive comp in the fourth quarter is planned as our prior year comparisons ease. And in the Corporate Apparel segment, revenue increases of 11% to 12% are expected as customer-driven uniform programs are delivered in the last half of 2012. Our total gross margin is also expected to expand in the third and fourth quarters, mainly for retail segment occupancy cost leverage and from realized cost synergies in the Corporate Apparel segment following the integration of Alexandra and Dimensions last year. In addition, SG&A expenses increases are planned in the last 2 quarters of 2012, primarily for marketing and payroll spend in support of our planned sales increases and because of the 53rd week in fiscal 2012.

As George also noted, this will be our first profitable fourth quarter since 2007 when we added the After Hours tux rental stores to our business. We found that when we closed these tux rental stores, a significant portion of the revenue migrated to nearby Men's Wearhouse stores. We have since closed almost 200 tux rental stores mainly from the over 500 tux rental stores we acquired, which has resulted in much lower operating expenses in the fourth quarter when tux rental revenues are seasonally low. This is a significant factor in the expected improvement in our 2012 fourth quarter results.

On the balance sheet side, we are expecting our cash balances at year end to increase in a range of 10% to 15% over the prior year. We also expect inventories to increase over the prior year end but at a lesser percentage than sales and mainly as a result of increased Men's Wearhouse stores. And we are increasing our capital expenditures estimate for this year to a range of $125 million to $135 million mainly because of additional new Men's Wearhouse stores to be opened this year, as well as planned improvement for our recently acquired and expanded office facilities in Fremont, California. We are now expecting to open approximately 35 Men's Wearhouse stores, 3 Moores stores and 1 K&G store in fiscal 2012.

This concludes my remarks, so I would now like to turn the call over to our CEO, Doug Ewert. Doug?

Douglas S. Ewert

Thank you, Diana. Good morning and thank you, all, for joining us today for our second quarter 2012 investor call and for your interest in our company. I'm pleased with the overall results of the second quarter. At our core Men's Wearhouse and Moores divisions, which represent over 75% of our overall revenues, customers are responding to the broad appeal of our merchandise selections, our timely brand building and promotional marketing messaging, our tuxedo rental services and our store expansion strategies. We became the largest Men's specialty retailer in both the U.S. and Canada by focusing on the apparel needs of the baby boomer generation. This generation prefers their clothes to fit comfortably and not too close to the body, those with more classic fashion tastes like pleated pants and a generous fit. Today, about 20% of our customers prefer the classic look. Those with more modern fashion taste have resonated with flat front pants, narrower lapels, side vent jackets and a fit that is more tailored but still comfortable. Today, about 50% of our customers prefer the modern look.

The millennial generation prefers clothing that fits much closer to the body and produces a slimmer, more flattering look. Today, about 30% of our customers prefer slim fit clothes, and this merchandise represents the fastest-growing part of our business and provides evidence that we are successfully expanding the demographic appeal of both the Men's Wearhouse and Moores brands.

Our new marketing campaign, launched at the end of the first quarter, effectively communicates the relevance of both Men's Wearhouse and Moores to the millennial generation. We show young men expressing individuality by mixing tailored and casual elements together. The feedback we have received from our current customers and our future customers has been very positive.

Let me share a couple of comments we've seen on social media that represent the tone of the feedback. Joel [ph] wrote, "Men's Wearhouse commercials get cooler and cooler." Kev [ph] wrote, "Look at Men's Wearhouse knowing when to turn the corner with their image. I dig the ad." So these types of commercials and the numerical evidence suggest that we're heading in the right direction with our marketing. By leveraging the strength of our brands, our 730 full-line stores in the United States and Canada, each staffed with expert wardrobe consultants and on-site tailors, we are securing our future as the leading Men's specialty store for the next generation as well.

Further evidence of our brand acceptance from the millennial generation can be found in our tuxedo rental business. Each year, we rent more tuxedos than the previous year, and this year will be no exception. During the second quarter, we experienced the largest prom season we have ever seen. Our wedding business, which is the majority of the tuxedo business, is going to be larger than last year as well. Our exclusive Vera Wang tuxedos, which are available in both modern and slim fit, are gaining momentum, and the levels are exceeding our expectations. Since the premium quality of the Super 130s Vera Wang tuxedo brings a higher average ticket, we're seeing a meaningful lift in our overall average transaction value.

The strength of our tuxedo rental business, coupled with the broad demographic appeal of our retail merchandise, has expanded the opportunity for additional store growth. As we've shared in previous calls, we believe that we can profitably operate 850 to 900 full-line stores in the United States and Canada. Some of these new stores will be full-size stores in existing markets, while others will be smaller stores in new markets that further leverage our national media spend.

In all, we plan to open approximately 30 Men's Wearhouse stores and 3 Moores stores this year. While we have the Men's Wearhouse and Moores stores to service the middle market customer with high-quality products and exceptional service in a specialty store environment and K&G to service extremely price-sensitive men and women in a big box environment, the moderate menswear customer is left the shop mostly in discount department and outlet stores. We believe the moderate menswear market is substantially larger than the middle market, and we see opportunity for a specialty store that caters to the moderate menswear customer with a breadth of product that appeals to both baby boomers and millennials. The quality must be good. The service must be helpful and include on-site tailoring, and the prices need to be competitive with discount department and outlet stores.

During the fourth quarter of this year, we're going to open 5 stores and outlet centers under the Men's Wearhouse outlet brand. We're going to leverage our brand, our experience, our service culture and our marketing spend to create a compelling alternative for this underserved customer. In the future, there will significant opportunities to expand our market share through store expansion and outlet centers, which would be in addition to our 850 to 900 full-line Men's Wearhouse and Moores stores.

K&G, our deep discount and extreme value big box concept, predominantly targeting an urban customer, represented 14% of our second quarter sales. Comp store sales were down 3.3%, though remain positive on a 2-year basis. We project comps to improve in the back half of the year, as we lap easier comparisons from 2011, and we project the operating margin for the year to be higher than the previous year. A few weeks ago, we introduced a new marketing campaign featuring Blair Underwood as a brand spokesman. We believe our partnership with Blair will resonate with our target customer and help communicate the extreme value and unique merchandise K&G offers.

Our Corporate Apparel segment represented 9% of our sales during the second quarter. The effects of the anticipated lower sales in the second quarter were offset mainly by the cost synergies from the integration of Dimensions and Alexandra that was completed at the end of last year. We are poised for a solid second half, as we launch planned new corporate uniform programs, both domestically and abroad, for some very well-known customers.

In summary, I believe we are effectively managing our businesses, balancing the need for short-term results with long-term sustainability and growth. Our merchandising and marketing efforts are working synergistically to satisfy the needs for our customers today while building acceptance and credibility with our customers of tomorrow. And of course, none of this would be possible without nurturing our most valuable asset, our service culture and the 17,000 men and women who deliver world-class customer service every day.

Thank you for your interest in our company and for your business. I'll now turn the call over to the operator for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Brian Tunick with JPMorgan.

Brian J. Tunick - JP Morgan Chase & Co, Research Division

I guess 2 questions. First, the SG&A guidance looks like it's been taken up from previous guidance, and it looks like advertising, I think, was up 20% in Q2. So just wondering if we should expect a similar rate going forward, as you invest in driving traffic and sort of have you changed some of your BOGO advertising plans? And then the second question would be sort of on the David's Bridal acquisition by a private equity firm. We were wondering if that at all changes your relationship or the lead-ins that you have in the tux rental business.

Diana M. Wilson

Let me address your SG&A question first on the guidance. We are anticipating some increases in our SG&A expenses, primarily related to advertising as well as payroll-related costs connected to our increased sales expectations. And the growth is in line, we believe, with our sales, but we're still getting leverage off of the SG&A increases.

Douglas S. Ewert

And Brian, I'll address the David's Bridal comment. We have a long-term contract and relationship with David's Bridal, which I think is very much a win-win relationship for both organizations, and we're looking forward to working with our new partners there.

Operator

Our next question comes from the line of Richard Jaffe with Stifel, Nicolaus.

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

Just a quick follow-up on outlet business and how that's going to compare to your full price business, will that be more of an everyday low price but with the same level of service? And could you comment about e-commerce? It was an opportunity that you discussed in prior calls and have been investing in and haven't heard much about it today. And then lastly, product costs, the changes we've seen over the last year with costs increasing and now seem to be pulling back, how that's affecting your costs and maybe outlook for margin as well?

Douglas S. Ewert

Well, first of all, with outlets, we see the opportunity to establish our price points competitive with the discount department store and outlet chains. So for example, suits, you'll see average out-the-door prices around $150 and so on throughout the rest of the categories. As far as e-commerce goes, it continues to be a significant growth opportunity and focus for us as an organization. We are making investments in new platforms and richer functionality and mobile functionality, trying to create a multichannel experience that really delivers on the brand reputation of the Men's Wearhouse. And I will point out that our stores have really embraced our web business and are driving a significant amount of it through some functionality that we have in place in stores that allows them to add e-commerce product to in-store transactions and get combined commission on that transaction, and that is really helping to drive a significant amount of our e-commerce revenue. And then finally is costs, we see input costs leveling out and actually starting to abate little bit in the back half of this year, and then it will continue to abate next year. But this year, we'll mostly experience it in cotton products, and to remind you, we hedged in wool, so we already have some pretty favorable costing in wool relative to the market. And then next year, we'll start to see wool prices come down.

Operator

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

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

Another follow-up on the outlets, did you say 5 will open this year? What do you see as the ultimate potential for your outlet business? Will it be confined, I guess, to the U.S.? And if you could give us an update on your initiatives in the big and tall area and private label expectations, as to how that will fair in your mix.

Douglas S. Ewert

Thank you, Margaret. Yes, we are planning on opening 5 outlets during the fourth quarter of this year. We will open some additional outlets next year that we'll tell you about. But as far as the opportunity, there are about 200 outlet centers either in place or under construction in the U.S. right now. We think that the opportunity could be as high as potentially 120 of those that could support what we believe will be a profitable Men's Wearhouse outlet concept, and then beyond that, there may be opportunities in Canada as well. As far as big and tall continues to be a growth opportunity for us, we saw mid-single-digit increases in our big and tall business in the second quarter. It is roughly 1/3 of our overall business and is available in all of our retail chains, in all of our retail doors. And we're very excited about that business and continue to feature it in our marketing. And then finally, private label, the opportunity for us to grow our margins is to control brands one way or another whether we license them directly or whether we acquire them, and we're actively pursuing those opportunities. And so I believe that over the long run, there is opportunity to continue to expand our margins, primarily through those avenues.

Operator

And your next question comes from the line of Janet Kloppenburg with JJK Research.

Janet Kloppenburg

A couple of questions, Doug, on the outlet business, do you plan on sourcing that -- sourcing made-for-outlet product exclusively? And what are the margin characteristics of that outlet business look like right now? Could it come in at the same kind of P&L or operating margin that you're deriving from the Men's Wearhouse business? Second of all, I was impressed with the margin expansion at both the Corporate Apparel business and at K&G, and I'm wondering if there's further opportunities for margins to improve in those businesses. And lastly, I was hoping you could talk a little bit about the metrics of your suit business in the second quarter. I think suit comps might have been modestly down in the first quarter, and I was wondering if you could discuss the performance in the second quarter.

Douglas S. Ewert

Thank you, Janet. The outlet strategy is to stock these stores predominantly with sourced product. We will have mostly private label product. There will be some branded product opportunities, and then there will be some down-flow opportunities from the host Men's Wearhouse stores. As far as the pro forma profitability outlook for those stores, we're looking for four-wall contribution similar to what we see at Men's Wearhouse because we're going to be able to leverage a marketing spend and have slightly lower opening margins going in. But it should wash out to have similar profitability profile of Men's Wearhouse or at least, that's the way it looks on paper. As far as margin goes, as I addressed with Margaret's question, long term, we are still looking for opportunities to drive our margins, and we are actively looking to acquire and directly license brands so that we can sort more products ourselves and still offer a breadth of product that not only has private label on it, but has recognized brands on it as well. And then as far as the suit business, we did see an improvement in our suit business in the second quarter. We had single-digit increases in suits, and we have now lapped by far the biggest comp increases from the previous year in our suit business and see much more modest comps that we're up against the back half of this year. But overall, we're seeing some nice momentum. I think our merchandise assortment is well balanced and appropriate for our customer mix. And our marketing campaign is synergistically helping to drive new customers to our stores, and we're certainly seeing evidence with all of the slim and modern product that we're selling that we're appealing to a younger demographic and I think expanding our reach across generations, which is great for us long term.

Operator

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

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

Just wanted to dive into your expectations for merchandise margin and occupancy leverage in the back half of the year that's embedded in your gross margin guidance. What really gives you the confidence that you can lap significantly harder merchandise margin comparisons, particularly on the clothing product side in the back half? And what's going to drive that merchandise margin higher? Is it relief from product costs? Or is it AUR? Is it mix? A little color there would help.

Diana M. Wilson

The margins in the back half are going to be helped by better AURs, we believe, and there'll also be occupancy leverage in place, particularly in the fourth quarter with our 53rd week.

Douglas S. Ewert

And John, we've also taken some modest retail price increases earlier this year that are being very well accepted, and that will help.

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

Okay, great. And then any comments on intra-quarter same-store sale trends? I'm assuming your guidance for comps is based on current trends in the Men's Wearhouse concept.

Douglas S. Ewert

Yes, our guidance reflects our current outlook on the third quarter.

Operator

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

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

First question, as it pertains to your increased spending on advertising, it seems like you're seeing a little bit of lower traffic, I think, from what I'm reading in the 10-Q. So can you just reconcile maybe why we're not seeing a little bit better traffic with the increased advertising?

Douglas S. Ewert

Well, I'll -- thank you for the questions, David. I'll remind you that we're lapping some pretty high comps from the previous year. We are seeing transactions roughly flat. The AUR is really driving our increase, but I think what's more important is the mix shift that we're seeing in our customers, that our marketing has helped driving and our merchandising has helped delivering.

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Great. And then second, I was just curious if you can comment generally on the month-to-month performance in the second quarter, how did Father's Day go? And did you see any impact from promotional activity from any of your competition?

Douglas S. Ewert

We had a good June overall. I would tell you an interesting fact. We sold more suits in the month of June this year than we ever had in any given month in the history of the company. So we were quite pleased with the overall second quarter results and certainly our Father's Day promotional period. And then in July, we ran our annual suit drive, and we collected about 175,000 gently used garments that we will recirculate back into the emerging workforce through 200 nonprofit partners. That event was in August last year, and we pulled it forward to July. And that was a very successful event for us.

Operator

Our next question comes from the line of Betty Chen of Wedbush Securities.

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

I was wondering, Doug, if you can talk a little bit about the Moores business. It seems like the third quarter guidance for comps would imply an acceleration in the business. I know you've mentioned that it's also benefiting from some of the marketing campaign. Could you talk a little bit more about what could be going on there? And then also, in terms of K&G, comp seems to be decelerated a little bit in the second quarter, and I know we're lapping easier comps in the second half. But I was curious sort of your perspective on the segment over the longer term. What is your view of what K&G should look like perhaps a year or 2 out? And do you think that the contribution from that business can -- how does that relate to the Men's Wearhouse or Moores brands? And then lastly, I don't know, Diana, can you give us a sense of what sort of increase should we expect for the marketing budget in the second half? And should we expect that sort of increase to also persist into 2013?

Douglas S. Ewert

Thanks for the questions, Betty. I think there's a couple of things going on in Canada. First of all, the mix and marketing strategies are essentially identical in Canada as they are in the U.S. We have the opportunity for a more aggressive promotional posture in the third quarter this year over last year, which will help drive that -- the comp expectation. And then in the fourth quarter, we have much easier comps that we're lapping from last year. From a K&G perspective, I will tell you that our strategy for the last couple of years has been to stabilize that business, and I think that we have effectively done that. It contributes nice operating margin. It will contribute an increased operating margin this year, over last year in spite of the fact that the top line is a little mushy. We are seeing some reshuffling of the balance of our businesses, as we're having a hard time lapping the significant men's suit sales from a year ago. We're seeing some really nice increases in the children's business, in the suit separates business, in ladies' dresses and career apparel. So there's some nice offsetting businesses in there. And long term, I think until the economy really starts to get some tailwind, we're going to be challenged to see any significant growth out of K&G. We are catering to a portion of the population that is the most economically challenged in the country. But I think our team in Atlanta has done a fabulous job stabilizing this business and returning us to profitability at K&G after a couple of rough years when the recession hit. And then as far as marketing goes, I don't want to release our marketing spend or plan, but I will tell you that we're seeing some really nice results from the new campaign at Men's Wearhouse. We have high hopes for the new campaign just launched at K&G within the last couple of weeks, and we think that we're funding them appropriately. And should we get better results than anticipated, we would be looking to even increase that spend beyond so.

Operator

Our next question comes from the line of Susan Sansbury with Miller Tabak.

Susan R. Sansbury - Miller Tabak + Co., LLC, Research Division

You mentioned or you updated us on the penetration rate of modern fit and big and tall. Where do you see it at year end and over the -- when do you -- over the intermediate term? In other words, when would it top out? And then I have, I guess, a trivia question for Diana. The 52-week contribution in terms of sales, is that a number that you can discuss?

Diana M. Wilson

Let me address that first. We don't really disclose that number. But with the 2% EPS impact, you can back in pretty close to it.

Douglas S. Ewert

Thanks for the question, Susan. As far as modern fit and slim, I see those businesses continuing to grow as a part of the penetration of the business. Certainly, slim is the fastest-growing part of our business. I don't want to project where I think that will be at the end of the year. We'll update you at that point, but I anticipate that slim is going to continue to grow. I do not think we've seen the peak or anywhere close to it at this point. And as far as big and tall, I think big and tall is a continuing opportunity for us. I think we have an excellent value proposition for that customer. I think our competition is relatively weak in this space, and I see further expansion opportunities for us there.

Operator

Our next question is from the line of Brian Tunick with JPMorgan.

Brian J. Tunick - JP Morgan Chase & Co, Research Division

Just wanted to follow-up on the Corporate Apparel side, just a couple of questions there. Maybe just help us get some confidence in your visibility for the back half top line acceleration on the Corporate Apparel side. Also, maybe tell us what do you think the contribution from that segment could be for the full year and how important do you think that could be over time to get the company, I think, you've set a goal to get to double-digit operating margins for the company? And then secondly, I think you mentioned you expect cash to be up 10% to 15% at the end of year, so just wondering as you think about that CapEx for next year or how you think about buybacks or dividends, just sort of your priorities for that excess cash.

Diana M. Wilson

With respect to the Corporate Apparel top line growth for the rest of the year, that's representative of the timing differences in the rollout and other activity that is driven by our customers in the Corporate Apparel line. We have anticipated this level of activity pretty much all year. It hasn't changed much during the year. And that is at a level that for the total year will be slightly less than last year. But it is representative of a business base of very large, well-known customers primarily in the U.K. who provide very stable business opportunities for that business. The contribution for the full year will be significantly better than last year because, primarily, there will be no integration or acquisition costs in this year. So there will be a positive contribution coming from the Corporate Apparel segment. With respect to your question about cash at year end, we're not prepared to address what plans we are thinking about for 2013. That's still in the development stage, and we are expecting some increase in the cash balance but no decisions made yet about exactly what will be done with it.

George A. Zimmer

This is George. I'd just like to add one thing. When Diana talks about our corporate uniform business, she knows it better than anybody in the company. She went to England and supervised the acquisition.

Operator

Our next question comes from the line of Bruce Zessar with Advisory Research.

Bruce M. Zessar - Advisory Research Holdings, Inc.

I just wanted to follow up on the prior question specifically related to CapEx. In the 10-Q that was released today, it indicates that your expectation for the year has been raised again, that capital expenditures are expected to be in the range of $125 million to $135 million for 2012. And that looks like that would be about at the peak of where it was prior to the recession. While you don't have any specific numbers to provide for what you're thinking for 2013, can you give any indication of where you think CapEx is going to be in 2013? Do you think it'll be higher, about the same or lower than this year?

Diana M. Wilson

Well, again, Bruce, we can't really comment on 2013 plans as we've not formulated them to that point yet. I can say that our store growth plan, as Doug has indicated, is a continuation of growth for the Men's Wearhouse brand. And the outlet opportunity is just another growth area for stores. So we would expect to continue to invest in our business in that manner.

Bruce M. Zessar - Advisory Research Holdings, Inc.

Okay. And when do you think you'll be in a position to talk about your 2013 CapEx plans?

Diana M. Wilson

Probably when we release our year earnings for 2012. We typically present our plans for 2013 at that time.

Operator

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

Janet Kloppenburg

I just had one more question on the outlet stores, Doug. Is this a plan that is a rollout plan? Or is it a test plan right now? If it is a rollout plan, do you have an idea of how many you might open next year? And will this expansion vehicle mean that you may slow down the opening of the Men's Wearhouse stores going forward?

Douglas S. Ewert

Thank you, Janet. I would tell you that we're not prepared to release how many stores we're going to open next year at this point. We are still working on those plans. And I believe that the outlet customer is predominantly a different customer than Men's Wearhouse. We're obviously going to be measuring cannibalization and whatever impact there may be very closely. And I think with our Perfect Fit rewards program, we're going to have very good visibility into that effect. But I do not believe that an outlet rollout strategy will have a negative impact on our Men's Wearhouse core store rollout strategy.

George A. Zimmer

Remember that our competitors have outlet presences, Brooks and Jo Bank.

Operator

Our next question comes from the line of John Kernan with Cowen.

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

Just one quick follow-up pertaining to some – a maintenance question pertaining to the model. The tuxedo alterations and other gross margin was down pretty significantly in Q4 of last year. Can you remind us what caused that and what type of margin recovery in that side of the business can we expect in the fourth quarter this year?

Diana M. Wilson

There were some refinements of the costs for the year that impacted fourth quarter, and because fourth quarter is the lowest volume period for tuxedo rentals, relatively minor adjustments can have a disproportionate impact. And that's the primary reason.

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

So it's really just a onetime item related to last year and can expect that up pretty significantly this year?

Diana M. Wilson

Yes.

Operator

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

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

I was wondering, Doug, to follow up on your earlier comment regarding full-line opportunity, I believe you said it's about 850 to 900 for both Men's Wearhouse and Moores. Could you give us a sense if that's correct? Could you give us a sense how that would be split by the 2 brands?

Douglas S. Ewert

Yes, we currently believe that we can have about 750 full-line Men's Wearhouse stores in the U.S. And in Canada, we have 117 now. That number can probably go up by another dozen or so.

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

And then in terms of the e-commerce business, could you remind us what it was as a percent of sales in the quarter? And I believe you had set a long-term goal for where that channel can be longer term. Could you just remind us what that number is?

Douglas S. Ewert

Betty, we're not releasing that number, but I will tell you that it continues to be a pretty significant growth opportunity for us.

Operator

And at this time, I am showing no further questions. I would like to turn the call back to management for any closing remarks.

Douglas S. Ewert

Okay, thank you very much for your interest in our company, and we look forward to sharing our third quarter results with you in a few months.

Operator

Ladies and gentlemen, this does conclude today's conference call. If you'd like to listen to a replay of today's conference, please dial (303) 590-3030 and enter access code 4561672. Thank you for your participation, and you may now disconnect.

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