This summary is based on the first quarter fiscal 2008 earnings call conducted The Men’s Wearhouse (MW) on May 28, 2008.
Management:
Chairman and CEO: George A Zimmer
EVP and CFO: Neil P Davis
DRG & E: Ken Dennard
Key Investor Issues
- Q1 GAAP EPS were 19 cents versus 75 cents in the same period last year.
- Quarterly total net sales eased by $35 million to $491.1 million.
- Excluding the Golden Brand closure costs, full year GAAP EPS are forecast to be in the range of $1.65 to $1.75.
First-Quarter Financial Highlights
The total clothing sales of $388.5 million declined 4.6% from $407 million in the year ago quarter.
- Tuxedo rental revenues of $70.2 million decreased 18.6% from $86.2 million in Q1 of 2007.
- Based on the initial guidance for the quarter, the company was only 75 basis points below the targeted quarter-over-quarter growth rate, due to weaker than expected clothing sales in Canada.
- In the U.S., the traffic sales in stores continue to be weak and the buying rate of customers is reportedly becoming more conservative.
- The management is of the opinion that the Canadian customer is feeling the impact of rising energy and food prices.
- Despite this, the company is benefiting from the mitigating factors of a relatively strong job market, housing prices and easy credit.
The diluted EPS were 19 cents for the first quarter.
- The adjusted diluted EPS were 20 cents after excluding $900,000 of closure costs incurred in connection with the company’s previously announced planned closure of the Canadian based manufacturing facility operated by Golden Brand.
- This compares with adjusted diluted EPS guidance of 20 cents to 24 cents.
- The diluted EPS for the prior year Q1, after pro forma adjustments for the April 9, 2007 After Hours acquisition as if it had occurred on January 29, 2006 were 59 cents.
- The prior year first quarter GAAP diluted EPS were 75 cents.
The total company sales decreased 6.7% for the quarter.
- The apparel sales, representing 79.11% of 2008 total net sales, dipped 4.6% due to decreases in the company’s comparable store sales driven by a reduction in store traffic levels.
- Tuxedo rental revenues, representing 14.29% of 2008 total net sales, decreased 18.6%. The decline was a result of reduced tuxedo rental sales at the company’s stores acquired from After Hours as well as the sale of the acquired wholesale tuxedo rental operations in July 2007.
- The declines were partly offset by increases at the company’s Men’s Wearhouse stores.
The quarter-over-quarter performance was affected by two major variables.
- The retail clothing business across all retail concepts dipped due to reduced store traffic as well as conservative buying patterns of customers. This is severe in California and Florida.
- The recent industry research studies reported a sharp decline in the U.S tailored clothing over the last 12 months especially in the suit category.
- The reports indicate that the suit category is down in dollar terms about 14%.
- The management advised that the company’s estimated suit market share at the current level of business in Men’s Wearhouse and K&G combined has risen from 17% to 19%.
- While the category as a whole has weakened, the company’s position has not. This is due to the merchandise teams working hard and identifying and funding areas within the specialty store focus that are outperforming the averages.
- According to the management, the most challenging area in the clothing business is at the K&G stores.
- The stores reported a decline in comparable store sales of 14%.
- The company hired a new chief merchandising officer, Mary Beth Blake, who has a long and respected tenure in both men’s and women’s clothing categories.
- At the beginning of the year, the company engaged an outside firm to explore potential changes in the four-wall layout and visual presentation of the K&G stores.
- The testing of those ideas and concepts will begin in a few stores in Q3 and Q4.
- The second variable impacting the performance of the company during the quarter was the tuxedo business.
- This is especially evident in the stores acquired last year under they brand name After Hours.
- The management believes that the re-branding from After Hours to MW Tux is having a dampening effect.
- The results were within 1% of the sales target for tuxedo rentals in Q1 in dollar terms.
- The company advised that it is not able to completely eliminate the risks of softer tuxedo rentals than planned because these emanate from macro-economic conditions.
- The management reported that MW Cleaners continues to grow and the company continues to explore new partnership and leverage opportunities.
- At Twinhill, a direct mail campaign to encourage new corporate customers to shop at Men’s Wearhouse stores was substantially stronger than typical direct mail campaigns.
- The initial response rate was 18% and 63% of the respondents to the roll out mailing were new customers to the Men’s Wearhouse.
The gross margin before occupancy costs, as a percentage of total net sales, decreased 28 basis points from pro forma 58.38% to 58.10%.
The increases in clothing product margins, as a percentage of related sales, of 97 basis points were offset by a reduction in the percentage of total net sales derived from tuxedo rentals from 16.38% to 14.29% as well as deleveraging of fixed costs related to alteration and other services.
Quarterly occupancy costs increased, as a percentage of total net sales, by 271 basis points from pro forma 12.27% to 14.98%.
