The Men

123jump.com Staff
21 Jun, 2009
New York City

The men''s apparel retailer net quarterly sales declined 5.5% to $464.1 million on comparable store sales fall of 7%. Net quarterly earnings plunged 46.4% to $5.3 million. Earnings per share dipped to 10 cents from 19 cents a year-ago quarter.

The Men’s Wearhouse, Inc. ((MW))
Q1 2009 Earnings Call Transcript
June 11, 2009 5:00 p.m. ET

Executives

Ken Dennard – DRG&E
Neill P. Davis - Chief Financial Officer, Principal Financial Officer, Executive Vice President & Treasurer
George A. Zimmer - Chairman of the Board & Chief Executive Officer

Analysts

Betty Chen – Wedbush Morgan Securities
David Mann – Johnson Rice & Company L.L.C.
Janet Kloppenburg – JJK Research
Evren Kopelman – JPMorgan
Richard Jaffe – Stifel Nicolaus & Co.
Laura Champine – Cowen & Company
William Baldwin – Baldwin Anthony Securities

Presentation

Operator

Good afternoon ladies and gentlemen, thank you for standing by. Welcome to The Men’s Wearhouse first quarter 2009 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. If you have a question, please press the star followed by the one on your touchtone phone. Please press star zero for operator assistance at any time. For participants using speaker equipment, it may be necessary for you to pick up the handset before making your selection. This conference call is being recorded today, Thursday, June 11, 2009. I would now like to turn the conference over to Mr. Ken Dennard of DRG&E. Pleas go ahead, sir.

Ken Dennard

Thank you, Mary and good afternoon everyone and welcome to The Men''s Wearhouse first quarter 2009 earnings call. Today’s call will begin with a review of the first quarter results of the financial guidance summation by Neill Davis, who is Executive Vice President and CFO. George Zimmer, Chairman and CEO will then provide strategic commentary before opening the call to your questions.

Please remember we’ll be making a number of forward-looking statements today and all such statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions mentioned today due to a variety of factors that affect the company including the risks specified in the most recently filed Form 10-Q and Form 10-K.

This call is copyrighted material to The Men''s Wearhouse and cannot be rebroadcast without our express written consent. I would now like to turn the call over to Neill Davis. Neill.

Neill P. Davis

Thanks, Ken and good afternoon everyone. On Monday when we reported GAAP diluted earnings per share for the quarter of $0.10 which exceeded our guidance of break even to a mid-single digit loss range. Half of this favorable variance is a result of better than expected gross margins and the balance from lower than planned selling, general and administrative expenses.

The favorable impact to gross margin results are primarily driven by stronger comparable store sales within our retail apparel business in the US, and in particular within our K&G group of stores as they experienced a positive comparable sales result for the quarter of 2.3%.

Selling, general and administrative expenses were lower than had been planned and relate to operating efficiencies within our distribution infrastructure, negotiated travel and entertainment savings, and a favorable timing variance in our advertising spending.

Now for the details. Total company sales performance in the first quarter of $461.4 million declined 5.5% from last year’s first quarter of $491.9 million. Total clothing sales of $359.1 million declined 7.6% from last year’s first quarter of $388.5 million while Tuxedo rental revenues of $71.4 million increased 1.7% over last year’s first quarter revenues of $70.2 million.

Comparable store results for the quarter in our Men’s Wearhouse stores was 7% decrease. This was in line with our quarter total comp store sales expectations. However, retail performed better than expected due to increased customer traffic while we were on promotion.

Tuxedo rentals although increasing over the prior-year quarter were below our expectations largely due to softness in winter reservation for weddings.

K&G’s comparable store sales increased as I mentioned a minute ago, 2.3%. This exceeded our sales expectations for K&G due to stabilization in traffic trends as well as include average ticket levels. Both our men’s and ladies categories outperformed expectations. In Canada, comparable store sales decreased 4.3%. This was better than expected and is the result of an increase in average ticket extending from our promotional activities.

Gross margin before occupancy cost as a percentage of sales decreased 196 basis points from 58.1% to 56.14%. Decreases in our retail clothing product margins as a percentage of related sales of 327 basis points was driven by a decrease in merchandise margins resulting from customer response to our promotional activities.

We ended the quarter with retail apparel inventory below last year by 8.2% which compares to a decline in related sales of 7.6% for the quarter. We continued to be vigilant in managing our investments and inventory to support sales demand.

Occupancy costs decreased on a dollar basis by 1.3%. It increased in percentage of total net sales by 55 basis points moving from 14.98% up to 15.63% primarily due to the deleveraging effect of reduced comparable store sales.

Selling, general and administrative expenses before advertising decreased 10.7% from the prior-year quarter. As discussed in the previous conference call, we implemented a number of measures during the fourth quarter to adjust our operating costs to the realities and external conditions. These cost-cutting measures as well as operating efficiencies kept us realize SG&A leverage.

So to recap the first quarter results, our diluted earnings per share were better than our expectations as well as that expected by consensus views on Wall Street.

Our promotional posture is continuing to resonate with both new and existing customers and is positively impacting gross profit dollars due in large part to our marketing and merchandising initiatives. We are continuing to drive reductions in operating cost and increase efficiencies wherever possible without decrementing our market share. These things collectively contributed to our better than expected bottom line results.

Let me now turn your attention to our liquidity and balance sheet. At quarter end, our cash reserves and short-term investments were $125.2 million and outstanding debt was $39.2 million, which has a maturity date of February 2011. We finished the quarter with capital expenditures of $50 million and expect to be in line with our last full year guidance range.

Weighted average diluted shares outstanding of 52 million were 0.2% or 100,000 shares below than the first quarter of the prior year. We did not repurchase any shares in the quarter and therefore continue to have available 44 million of remaining authorization. Now that covers the review for the quarter.

Let me turn your attention to the second quarter. As we have discussed in the last call we have implemented modifications to our forward guidance practices primarily due to lag of forward visibility as to macro economic conditions. Specifically, we had provided guidance for the first half of the fiscal year and we have now updated the second quarter forward guidance. We will provide third quarter guidance when we report our second quarter results.

We anticipate our second quarter comparable store retail apparel sales to be down in the range of 4% to 6%. We are basing this on current trends plus our assessment of the overall economic climate. That being said we see some positive signs in terms of stability and our results can be impacted and are impacted by the level of promotional strategies that we have implemented. We anticipate a 3% to 5% increase in our Tuxedo rental business for the second quarter of the year. This is a modest reduction from our original plan and is reflective of the effects of a weak economic environment on the wedding industry that we had experienced in the first quarter.

Gross margins for the second quarter is still expected to be below the prior year particularly as we continue our accelerated promotional activity. However, the rate of decline for the second quarter is expected to be less than that realized in the first quarter and is driven by the higher mix of total sales in the quarter coming from our higher margin Tuxedo rental business.

As a reminder, the second quarter is a seasonal peak for our Tuxedo rental business which has positive implications on our margin. We anticipate second quarter occupancy cost on an average store basis to be flat in dollar terms.

Selling, general and administrative expenses before marketing expenses for the second quarter are expected to decline 6% to 8% when compared to prior-year cost and excluding $7.3 million in prior-year cost associated with the closing of our Canadian base manufacturing facility. The driver here included continuation of the benefit of actions initiated in the fourth quarter of the prior fiscal year to lower our cost.

Net interest expense is expected to decline for the second quarter as we increase our cash reserves from continued gains in free cash flow. Our effective tax rate for the second quarter is expected at 38.3% down from the prior year comparable period of 39%. The full year tax rate is now expected to be 37.2%.

We expect second quarter earnings per share then to be in the range of $0.56 to $0.60. That concludes my prepared remarks on the numbers. I will now turn the call over to George Zimmer, Chairman and Chief Executive Officer. George?

George A. Zimmer

Thank you, Neill. My remarks are going to be quite short although we are prepared to take your questions. The reason is that in real-time we have been working as many of you know on the acquisition or potential acquisition of Filene’s Basement and it is a work in process, a current negotiation. I have nothing further to say about it now nor will we be able to answer any questions concerning it later in the call.

Referring back now to our core business, The Men’s Wearhouse as well as Moores which often are parallel to each other I would describe it as we are satisfied but not thrilled with the results. Yes, we are beating plan but as we all know we are still running negative comps. Business remains tough. We are still concerned.

There is, however, a bright spot and that is as I guess we all saw K&G. For the first time in many times quarters K&G had a positive comp. Everybody is aware that that segment, the off-price segment has been outperforming the rest of the retail apparel segment and K&G is no example.

Now, there have been some significant changes to K&G to contribute to their positive numbers and must number one acknowledge our leader, Mary Beth Blake, who continues to do an outstanding job. We are for the first time showing significant increases in ladies wear now approaching double digits. We have launched a new marketing campaign with a new advertising agency, a campaign we refer to as “K&G fashion without the victim.” We think the preliminary results are good but certainly not great.

Before opening this up for your questions, I would like to make the following observation. As we have been looking at the Filene’s acquisition we have been of course looking at our own K&G business in terms of how the two would be integrated. We have noticed that they sell more women’s wear than we do. We have noticed they sell more sportswear while we sell more career wear. They have less urban than we do. What I am saying here is that regardless of how this acquisition may turn out we feel that our default position still strengthens K&G and we see this still as our primary growth vehicle going forward.

Thank you and we will take our questions.

Question-And-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. As a reminder, if you have a question, please press the star followed by the one on your touchtone phone. If you would like to withdraw your question, please press the star followed by the two. If you are using speaker equipment, you will need to lift the handset before making your selection. Please ask one question and one follow up and re-queue for additional questions. And our first question comes from the line of Betty Chen with Wedbush Morgan. Please go ahead.

Betty Chen – Wedbush Morgan Securities

Thank you and good afternoon, everyone. Congratulations on a great quarter. Neill, going back to your comments regarding Q2 it sounds like we continue to see business improving and stabilize in the second quarter. Could you elaborate a little bit more on what you are seeing of the K&G and The Men’s Wearhouse positions if we continue to see the promotions which appears to be expanded for Men’s Wearhouse so effective in driving traffic. That would be very helpful. Thanks.

Neill P. Davis

The promotional activity that we initiated back in November in the beginning of the fourth quarter last year that has continued into the current fiscal year is as I indicated in the first quarter having positive impact on traffic levels. It continues into the second quarter.

The second quarter is a key quarter for us relative to our overall promotional activity on a normalized basis as we have built up our positioning and programs around the month of June. So we are now in the middle of those events and our customers are beginning to see greater depth in terms of the value that we are making available to them in our stores and this is both true with Men’s Wearhouse as well as K&G. And I am sure that you may have seen some of that color in some of our advertising and George had touched on it a little bit earlier so the continuation of responses there and that’s a big reason why we have given our same store sales for retail in the second quarter at a stronger pace than that that we gave going into the first half this year.

Betty Chen – Wedbush Morgan Securities

Great. And could you elaborate a little bit more about what Mary Beth has been doing. I know that she has been repositioning ever since she joined the company in the merchandising at K&G. Could you give us a little bit more color around what’s been working in the men’s category and the women’s? And what are some changes that we could see happening at that concept?

George A. Zimmer

Yes, let me comment Neill and then you might add. One of the things that should be mentioned is that our inventory levels are being managed extremely carefully and one of the things that Mary Beth has been instrumental in is decreasing our men’s inventory and increasing our ladies inventory. Now I would tell you and this is again fairly real-time we have been talking on the telephone this week but I believe that Mary Beth now has a heightened sense of confidence about the direction that she is taking the company.

We have moved the suits to the back of the store and have ladies upfront. This seems to not hurt suits and help ladies. So, we are really thrilled with Mary Beth.

Operator

Thank you. Our next question comes from the line of David Mann with Johnson Rice. Please go ahead.

David Mann – Johnson Rice & Company L.L.C.

Thank you. Good afternoon. In terms of the Tuxedo rental business, can you talk about some of what you have been trying to achieve in terms of converting the customer to retail purchases.

George A. Zimmer

Well, this remains an ongoing challenge and I don’t want to suggest we have now discovered the solution because it is an ongoing obstacle. What we are experiencing right as I speak is we now have over 1,000 Men’s Wearhouse and Men’s Wearhouse and Tux stores that have our full young men’s sportswear and separates assortment. They did not have these goods in the first quarter but now in the second quarter they now have the full assortments. So we are starting to see some sales coming out of this area. It is far too soon to predict.

I don’t necessarily hang my hat on our ability to convert in real-time Tux rental customers into retail customers. That would be wonderful, don’t get me wrong. But I think that as long as this Tux rental customer gives us a leg up when they become a retail customer I am satisfied.

David Mann – Johnson Rice & Company L.L.C.

Thanks. And then in terms of your comments about the rental business, in terms of weddings, can you just give a little more detail in terms of the visibility going forward. Are you seeing continued weakness in terms of wedding bookings?

George A. Zimmer

I am sorry, Neill, go ahead.

Neill P. Davis

I was just going to mention that the 3% to 5% increase that we have for the second quarter is supported by very high rate of bookings in hand. We seem to be seeing a continuing bill at a rate that we are comfortable that supports that range and we are just able to better life size the top line growth rate. It seems to be developing fine and we have adequate bookings in hand to support that range for the second quarter.

George A. Zimmer

And I would simply add that we are all disappointed I think in our Tux rental performance even though it remains enormously profitable and successful. We are taking steps to do a better job in the future, I mean this year (inaudible) is over and in effect your weddings are already in-house. We are by no means tapped out in Tux rental.

Operator

Thank you. Our next question comes from the line of Janet Kloppenburg with JJK Research. Please go ahead.

Janet Kloppenburg – JJK Research

Good afternoon. George, I was wondering if you could elaborate a bit more on K&G given your comparison to Filene’s Basement and if you are thinking about increasing the percentage of the women’s business in the K&G stores or that’s a strategy that Mary Beth will be pursuing.

And Neill, I wondered if there was any public update about what was happening in the auction process. I know you don’t want to talk about it but I think there may have been another auction today or there is one for later today, I was wondering if you could just talk a little bit about that. And lastly, George, you have changed the business model for The Men’s Wearhouse stores now being more promotional than you were in the past and I wondered if that’s something that you consider permanent. Thank you.

George A. Zimmer

Right. Well, let me comment on the ladies at K&G. I tried to suggest this a moment ago that Mary Beth was already making the changes at K&G that I described including a greater percentage of branded product, more upscale brands, more women’s, less men’s. These changes were underway under Mary Beth’s leadership. What has happened is that Mary Beth’s confidence has been strengthened, which if you ever had a leadership position is one of those magical things and now she is going to be accelerating the development in our branded program and our ladies program raising the percentage of ladies even more than she was attempting, raising the percentage of branded even more than contemplated. So, I see that is what’s happening with our ladies.

The new promotional stance we have taken actually seems to be working out quite well. We no longer offer buy one get one free on a significant amount of inventory on a regular basis. Right now you will see there is a summer sale being advertised so there will continue to be many promotions but because of some of the price increases we took we have been able to mitigate the deterioration in product margins from what was originally expected and I believe Neill indicated that in his remarks.

Neill P. Davis

Janet, what I will say about the following situation. At a hearing yesterday, the bankruptcy court had directed Filene to conduct a new auction which will take place tomorrow. That’s all.

Operator

Thank you. Our next question comes from the line of Brian Tunick with JPMorgan. Please go ahead.

Evren Kopelman – JPMorgan

Thanks. It is Evren Kopelman for Brian. Good afternoon. The first question, if you look at the old After Hours locations like your 478, do you feel like that is a good number of locations or do you think about shrinking that, I guess what would be more of a ideal size. And can you also comment on how the merchandise you put in into those stores, how that is performing in terms of listing the average sales volume?

George A. Zimmer

Well, that was the merchandise I referred to a moment ago and that just has really arrived in the second quarter. This is really now what I have to say about it at this time. Let me comment on your first question about the 470 After Hours, formerly After Hours locations, now Men’s Wearhouse and Tux. There definitely has been and will continue to be a decrease in the number of those stores for the simple reason that most customers prefer coming to a regular Men’s Wearhouse store as opposed to these. But of course each store is separate. But it would seem to me that if you were to look out over the next several years you would continue to see modest growth in regular Men’s Wearhouse stores and modest decrease in Men’s Wearhouse and Tux stores. Where that ends up I couldn’t be sure but if you said to me might bring it down to 440 Tuxedo rental stores, absolutely. But Men’s Wearhouse will be able to go over 600 stores because now that we rent Tuxedos in our regular stores we can open our cut down regular stores in smaller markets.

Operator

Thank you. Our next question comes from the line of Richard Jaffe with Stifel Nicolaus. Please go ahead.

Richard Jaffe – Stifel Nicolaus & Co.

Thanks very much. I guess a question about is the path you have chosen to go down which was the BOGO or buy one get one free designer promotion and it’s something that you guys have effectively avoided most of your career. Obviously these are unique circumstances but I am wondering what your thinking is regarding promotion and price point discount for the second half and as you anniversary these BOGO events.

George A. Zimmer

Richard, I mean not that anybody watches our television close enough to know exactly what we are doing but we are running a combination of spots, some are branding spots and some talk about something that is promotional. Currently it is a summer sale. It has been a BOGO. Those by the way are 15 seconds long and our branding spots tend to be 30.

We plan on having a similar posture I think going forward – an ongoing promotional environment including BOGO but certainly not exclusive BOGO although it may appear that way until the fall that we are exclusively BOGO. We are not.

Richard Jaffe – Stifel Nicolaus & Co.

Okay. So, it is some but not the same. Should we anticipate that other things will be used or other tricks up your sleeve so to speak?

George A. Zimmer

Exactly.

Richard Jaffe – Stifel Nicolaus & Co.

Okay. Thanks very much.

Operator

Thank you. Ladies and gentlemen, as a reminder if you have any questions, please press the star followed by the one on your touchtone phone. If you are on a speakerphone, please lift the handset before making your selection. And our next question comes from the line of Laura Champine with Cowen & Company. Please go ahead.

Laura Champine – Cowen & Company

Good afternoon. It’s good to hear you mentioned K&G and their growth vehicle. It is their first positive comp I think since the October 2006 quarter. Is it too soon to think about unit growth for that concept or is there a target number of units we should be thinking about?

George A. Zimmer

Without having actually thought about it in a specific way but more in a 40,000 foot way I would answer that it is too soon to think about unit growth.

Laura Champine – Cowen & Company

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Bill Baldwin with Baldwin Anthony Securities. Please go ahead.

William Baldwin – Baldwin Anthony Securities

Thank you. Can you offer any color, either Neill or George regarding the promotional activity as far as the younger demographic that has brought into your store? You know you mentioned it has brought in new customers as well as existing customers. I just wonder on the new customer side has there been a younger demographic that has responded to your promotions so far?

George A. Zimmer

Well, let me explain it by talking about denim. Our denim sales have never been better. We carry designer denim that is either a $100 or above and then we have private label denim that is $59, $69 and it is all doing well. The younger customer is not concerned about designer prices whereas the traditional Men’s Wearhouse customer finds paying for a pair of jeans what he buys a suit on sale for to be objectionable.

William Baldwin – Baldwin Anthony Securities

Okay. So what you are saying is that you are seeing a younger demographic obviously responding to your promotions. Secondly, can you give us some color and update on what’s transpired in Twin Hill’s?

George A. Zimmer

Probably the best thing I can say about Twin Hill right now because as you might imagine companies are not aggressive with their uniform budgets now. But we have added a very young executive to our team. We are really excited about his long-term ability to develop this organization. But business actually is struggling right at the moment although we still expect to be alive; it’s not as glamorous as we had thought 90 days ago.

Operator

Thank you. Our next question is a follow up from the line of Betty Chen. Please go ahead.

Betty Chen – Wedbush Morgan Securities

Yes, hi. I was wondering if you can elaborate a little bit about the marketing spend since it has been so successful to support Men’s Wearhouse and K&G with some TV campaign. How should we think about advertising budget for the second quarter and for 2009 on an annual basis?

George A. Zimmer

Well, as we said at the beginning of the year, even though we were going to be under enormous pressure at the bottom line EPS level that since we dominated our category and had virtually no debt we were not going to reduce our marketing spend and if opportunities presented themselves because of lower demand we would consider even spending a little bit more and I would suggest that that’s more likely what I said at the end that because of increased opportunities our marketing spend in absolute dollars is likely going to be larger than LY.

Operator

Thank you. Our next question is a follow up from David Mann. Please go ahead.

David Mann – Johnson Rice & Company L.L.C.

Yes, thank you. In terms of the BOGO promotion, can you just talk about the performance by category? How did suits do relative to other categories within the Men’s Wearhouse stores?

George A. Zimmer

It’s overwhelmingly about suits more so than normally.

David Mann – Johnson Rice & Company L.L.C.

Okay. And then in terms of, Neill, you talked about occupancy expense as being flattish in the second quarter. Can you talk a little bit about how far along you are in terms of the rent renegotiations? And also give us a sense, it would seem like you would be able to get some year-over-year declines in the back half. Any comment on visibility in terms of back half occupancy expense.

Neill P. Davis

We still think it would be down. We always keep our real estate team busy and the top priority for them when they integrate that with their ongoing activity and that activity has reflected in the projections that we have identified and I think the smartest decrease in the years are still playing and keep in mind too that’s an aggregate dollar number year-over-year and that we had opened up a fair amount of stores last year so we are bringing on a fair amount of incremental rent on a full-year basis. So there’s really nothing new David to speak up. The process has been in place. The results are being achieved and that’s where we are. So nothing major changed in that regard.

George A. Zimmer

One other thing if I could add. We have so many locations. We have an advantage here because we negotiate 200 a year and in terms of our Tux rental locations we now can go to landlords and with confidence say you are going to have to lower your rent or we are going to close this location, and so, we think there is still a lot of room throughout the organization to avail ourselves of rent reductions.

Operator

Thank you. We have a follow up from the line of Janet Kloppenburg. Please go ahead.

Janet Kloppenburg – JJK Research

Hi. George, I was a little confused. I guess I missed something about raising prices or maybe there has been a mix change so some suits are higher priced while others are on a summer sale or being BOGOed. So I would love a clarification on that and also, if you could comment a little about sourcing. We are hearing from most of our companies that product costs are declining which should help IMUs going forward. If you could comment on how that may be affecting your business.

George A. Zimmer

Let me talk about the first point. And I will just give you an example, okay. We sell a lot of, I am wondering now if I should mention the name here, probably not, either 299 or 399 and these are very high profile brands that are ticketed over $500 in other stores and we felt we weren’t getting enough credit selling them at those prices. So we selectively raised prices, waited an appropriate period of time and then on a rotating basis offer them at two-fourth that price.

So, I will just give you an example. If a garment was $399 and is now $499, you now can buy the $499, occasionally two for $499 or pay 250 a copy, much lower than they used to be at 399. So it is a different way of pricing and presenting our merchandise. I hope that was clear.

Operator

Thank you. And Mr. Davis, at this time I will turn the conference over to you for closing comments. Please go ahead, sir.

Neill P. Davis

We certainly thank everyone for their continuing interest and we look forward to talking to everyone soon. Thank you for your participation today.

Operator

Thank you. And ladies and gentlemen, that will conclude today’s teleconference. If you’d like to listen to a replay of today’s conference, please dial in 303-590-3030 or toll free 1-800-406-7325 and entering the access code of 4094764#. Please thank you again for your participation and at this time you may disconnect.