This summary is based on the third quarter fiscal 2008 earnings call conducted by The Men’s Wearhouse Inc. (MW) on November 19, 2008.
Management:
Chairman and CEO: George A. Zimmer
CFO, Principal Financial Officer and EVP: Neill P. Davis
DRG&E: Ken Dennard
Key Investor Issues:
- Q3 total company sales were $459.7 million versus $512.1 million in the prior year period.
- Third quarter effective tax rate was 38%.
- The management expects the adjusted full year diluted EPS to be in the range of $1.04 to $1.22.
Third Quarter Financial Highlights:
Total company sales performance in the third quarter of $459.7 million declined 10.2% from last year’s third quarter of $512.1 million.
- Total clothing sales of $334.4 million declined 12.9% from last year’s third quarter of $384 million.
- The tuxedo rental revenues of $96.5 million were slightly higher than last year’s third quarter revenues of $96.1 million.
- The management reported that initial Q3 expectations were comparable store sales decline in the high-single-digit range for core Men''s Wearhouse stores, which includes the MW Tux stores.
- However, the economic downturn, worsened by the credit crisis, resulted in the reduction of the guidance in the mid-quarter period.
- The actual results for the quarter were a comparable store sales decline of 12.1%, due primarily to lower traffic levels.
- These declines in comparable store sales related solely to the retail apparel business.
- The management reported better-than-expected tuxedo rental revenues when they had forecasted for a low-single-digit decrease in this business.
Comparable store sales expectations for K&G were initially targeted at a mid-single-digit decrease.
- Actual results were a decline of 13%, due mostly to reduced store traffic.
- Despite the challenges with the men’s category, the management was upbeat given the positive trending in several of the ladies categories.
- In Canada, comparable store sales results declined 4.9% versus an initial expectation of a low-single-digit decrease.
Third quarter gross margin before occupancy costs decreased 80 basis points from 60.8% to 60%.
- The decreases in clothing product margins as a percentage of related sales of 154 basis points were driven by deleverage on procurement and distribution costs and a decrease in merchandise margins mainly at K&G stores.
- The company reported that the decreases were offset by a higher percentage of total sales coming from higher margin tuxedo rental business.
- The actual gross margin results before occupancy were higher than the initial expectations as a percentage of sales contributing to a better-than-expected EPS results for the quarter.
- The company ended the quarter with retail apparel inventory below last year by 6.8% in total, down 8.7% on a per store basis and down 9.8% on a per square foot basis.
Quarterly occupancy costs increased as a percentage of total net sales by 205 basis points, moving from 13.89% up to 15.94%.
- The increase was primarily due to the deleveraging effect of reduced comparable store sales.
- On a dollar basis, actual occupancy costs were favorable versus the initial expectations.
- The improvement was due primarily to lower utilities and repairs and maintenance.
Excluding $1.8 million in costs associated with the closing of the Golden Brand manufacturing facility in Canada, SG&A expenses were down $4.2 million on a dollar basis compared with the prior year quarter.
- However, as a percentage of total net sales, SG&A adjusted for the closing costs increased 314 basis points from 35.4% to 38.54%.
- The increase was primarily due to the deleveraging effect of reduced sales.
- On a dollar basis, SG&A was favorable to the initial expectations due to lower variable costs resulting from the lower sales, store level cost control, lower general and administrative costs, and a foreign exchange gain on U.S. dollars held in Canada.
The management reported quarter end cash reserves and short-term investments of $101.8 million and outstanding debt of $88.6 million.
- Maturity dates for the outstanding debt obligations are $38.6 million due in February 2011 and $50 million due in February 2012.
- The company also has $150 million of committed borrowing capacity.
The company increased the annual CapEx plans for the current fiscal year, which relates to an increased allocation for technology enhancements for distribution, Internet and merchandising functions.
- The effect of that change is increase on the initial annual guidance to a new range of $80 million to $85 million.
- The management has identified a CapEx plan for fiscal 2009 targeted to enhancements of existing assets.
- This specifically relates to relocation and remodeling of existing retail stores and to infrastructure needs, specifically distribution and technology.
