e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| |
|
|
| þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended November 3, 2007
or
| |
|
|
| o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-16097
THE MEN’S WEARHOUSE, INC.
(Exact Name of Registrant as Specified in its Charter)
| |
|
|
| Texas
|
|
74-1790172 |
| (State or Other Jurisdiction of
|
|
(I.R.S. Employer |
| Incorporation or Organization)
|
|
Identification Number) |
| |
|
|
| 5803 Glenmont Drive |
|
|
| Houston, Texas
|
|
77081-1701 |
| (Address of Principal Executive Offices)
|
|
(Zip Code) |
(713) 592-7200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ. No o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o. No þ.
The number of shares of common stock of the Registrant, par value $.01 per share, outstanding
at December 10, 2007 was 52,349,753 excluding 17,154,460 shares classified as Treasury Stock.
Forward-Looking and Cautionary Statements
Certain statements made in this Quarterly Report on Form 10-Q and in other public filings and
press releases by the Company contain “forward-looking” information (as defined in the Private
Securities Litigation Reform Act of 1995) that involves risk and uncertainty. These
forward-looking statements may include, but are not limited to, references to future capital
expenditures, acquisitions, sales, earnings, margins, costs, number and costs of store openings,
demand for clothing, market trends in the retail clothing business, currency fluctuations,
inflation and various economic and business trends. Forward-looking statements may be made by
management orally or in writing, including, but not limited to, Management’s Discussion and
Analysis of Financial Condition and Results of Operations included in this Quarterly Report on Form
10-Q and other sections of our filings with the Securities and Exchange Commission under the
Securities Exchange Act of 1934 and the Securities Act of 1933.
Forward-looking statements are not guarantees of future performance and a variety of factors
could cause actual results to differ materially from the anticipated or expected results expressed
in or suggested by these forward-looking statements. Factors that might cause or contribute to
such differences include, but are not limited to, actions by governmental entities, domestic and
international economic activity and inflation, our successful execution of internal operating plans
and new store and new market expansion plans, including successful integration of acquisitions,
performance issues with key suppliers, disruption in buying trends due to homeland security
concerns, severe weather, foreign currency fluctuations, government export and import policies,
aggressive advertising or marketing activities of competitors and legal proceedings. Future
results will also be dependent upon our ability to continue to identify and complete successful
expansions and penetrations into existing and new markets and our ability to integrate such
expansions with our existing operations. Refer to “Risk Factors” in our Annual Report on Form 10-K
for the year ended February 3, 2007 for a more complete discussion of these and other factors
that might affect our performance and financial results. These forward-looking statements are
intended to relay the Company’s expectations about the future, and speak only as of the date they
are made. We undertake no obligation to publicly update or revise any forward-looking statement,
whether as a result of new information, future events or otherwise.
PART I. FINANCIAL INFORMATION
ITEM 1 — CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GENERAL INFORMATION
The condensed consolidated financial statements herein include the accounts of The Men’s
Wearhouse, Inc. and its subsidiaries and have been prepared without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. As applicable under such regulations,
certain information and footnote disclosures have been condensed or omitted. We believe that the
presentation and disclosures herein are adequate to make the information not misleading, and the
condensed consolidated financial statements reflect all elimination entries and normal adjustments
which are necessary for a fair statement of the results for the three and nine months ended October
28, 2006 and November 3, 2007.
Operating results for interim periods are not necessarily indicative of the results for full
years. These condensed consolidated financial statements should be read in conjunction with the
consolidated financial statements for the year ended February 3, 2007 and the related notes thereto
included in the Company’s Annual Report on Form 10-K for the year then ended filed with the SEC.
Unless the context otherwise requires, “Company”, “we”, “us” and “our” refer to The Men’s
Wearhouse, Inc. and its subsidiaries.
1
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
October 28, |
|
|
November 3, |
|
|
February 3, |
|
| |
|
2006 |
|
|
2007 |
|
|
2007 |
|
| |
|
(Unaudited) |
|
|
(Unaudited) |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
75,093 |
|
|
$ |
102,531 |
|
|
$ |
179,694 |
|
Short-term investments |
|
|
180,275 |
|
|
|
— |
|
|
|
— |
|
Accounts receivable, net |
|
|
17,671 |
|
|
|
24,118 |
|
|
|
17,018 |
|
Inventories |
|
|
481,885 |
|
|
|
515,917 |
|
|
|
448,586 |
|
Other current assets |
|
|
36,164 |
|
|
|
69,217 |
|
|
|
35,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
791,088 |
|
|
|
711,783 |
|
|
|
680,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, net |
|
|
277,510 |
|
|
|
392,917 |
|
|
|
289,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TUXEDO RENTAL PRODUCT, net |
|
|
57,542 |
|
|
|
71,120 |
|
|
|
57,565 |
|
GOODWILL |
|
|
58,261 |
|
|
|
73,674 |
|
|
|
56,867 |
|
OTHER ASSETS, net |
|
|
14,044 |
|
|
|
23,204 |
|
|
|
12,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
1,198,445 |
|
|
$ |
1,272,698 |
|
|
$ |
1,096,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
121,105 |
|
|
$ |
131,543 |
|
|
$ |
111,213 |
|
Accrued expenses |
|
|
78,691 |
|
|
|
123,214 |
|
|
|
95,249 |
|
Income taxes payable |
|
|
18,699 |
|
|
|
19,425 |
|
|
|
19,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
218,495 |
|
|
|
274,182 |
|
|
|
226,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM DEBT |
|
|
207,310 |
|
|
|
92,595 |
|
|
|
72,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEFERRED TAXES AND OTHER LIABILITIES |
|
|
49,216 |
|
|
|
68,294 |
|
|
|
44,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
475,021 |
|
|
|
435,071 |
|
|
|
343,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (Note 8 and Note 11) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Common stock |
|
|
676 |
|
|
|
695 |
|
|
|
691 |
|
Capital in excess of par |
|
|
271,030 |
|
|
|
301,690 |
|
|
|
286,120 |
|
Retained earnings |
|
|
702,828 |
|
|
|
868,968 |
|
|
|
752,361 |
|
Accumulated other comprehensive income |
|
|
29,009 |
|
|
|
51,929 |
|
|
|
23,496 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,003,543 |
|
|
|
1,223,282 |
|
|
|
1,062,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost |
|
|
(280,119 |
) |
|
|
(385,655 |
) |
|
|
(308,896 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
723,424 |
|
|
|
837,627 |
|
|
|
753,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
1,198,445 |
|
|
$ |
1,272,698 |
|
|
$ |
1,096,952 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
2
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
| |
|
October 28, |
|
|
November 3, |
|
|
October 28, |
|
|
November 3, |
|
| |
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clothing product |
|
$ |
366,409 |
|
|
$ |
384,164 |
|
|
$ |
1,135,759 |
|
|
$ |
1,190,282 |
|
Tuxedo rental, alteration and other services |
|
|
63,659 |
|
|
|
127,972 |
|
|
|
189,460 |
|
|
|
387,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
|
430,068 |
|
|
|
512,136 |
|
|
|
1,325,219 |
|
|
|
1,577,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clothing product, including buying and
distribution costs |
|
|
162,795 |
|
|
|
159,204 |
|
|
|
517,564 |
|
|
|
512,360 |
|
Tuxedo rental, alteration and other services |
|
|
28,696 |
|
|
|
41,324 |
|
|
|
86,063 |
|
|
|
126,418 |
|
Occupancy costs |
|
|
53,199 |
|
|
|
71,137 |
|
|
|
154,262 |
|
|
|
197,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
244,690 |
|
|
|
271,665 |
|
|
|
757,889 |
|
|
|
836,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
185,378 |
|
|
|
240,471 |
|
|
|
567,330 |
|
|
|
741,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
136,610 |
|
|
|
181,307 |
|
|
|
416,580 |
|
|
|
534,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
48,768 |
|
|
|
59,164 |
|
|
|
150,750 |
|
|
|
207,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
(2,461 |
) |
|
|
(1,352 |
) |
|
|
(7,249 |
) |
|
|
(4,655 |
) |
Interest expense |
|
|
2,346 |
|
|
|
1,304 |
|
|
|
6,826 |
|
|
|
3,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
48,883 |
|
|
|
59,212 |
|
|
|
151,173 |
|
|
|
208,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
17,109 |
|
|
|
22,145 |
|
|
|
54,922 |
|
|
|
76,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
31,774 |
|
|
$ |
37,067 |
|
|
$ |
96,251 |
|
|
$ |
132,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.60 |
|
|
$ |
0.70 |
|
|
$ |
1.81 |
|
|
$ |
2.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.58 |
|
|
$ |
0.69 |
|
|
$ |
1.76 |
|
|
$ |
2.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
53,098 |
|
|
|
53,141 |
|
|
|
53,163 |
|
|
|
53,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
54,903 |
|
|
|
53,775 |
|
|
|
54,715 |
|
|
|
54,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
3
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| |
|
|
|
|
|
|
|
|
| |
|
For the Nine Months Ended |
|
| |
|
October 28, |
|
|
November 3, |
|
| |
|
2006 |
|
|
2007 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
96,251 |
|
|
$ |
132,226 |
|
Adjustments to reconcile net earnings to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
45,191 |
|
|
|
57,293 |
|
Tuxedo rental product amortization |
|
|
14,627 |
|
|
|
36,976 |
|
Loss on disposition of assets |
|
|
1,325 |
|
|
|
13 |
|
Deferred rent expense |
|
|
1,180 |
|
|
|
1,374 |
|
Stock-based compensation |
|
|
5,139 |
|
|
|
6,071 |
|
Deferred tax provision (benefit) |
|
|
(4,873 |
) |
|
|
529 |
|
Increase in accounts receivable |
|
|
(797 |
) |
|
|
(2,205 |
) |
Increase in inventories |
|
|
(63,578 |
) |
|
|
(43,825 |
) |
Increase in tuxedo rental product |
|
|
(19,155 |
) |
|
|
(17,525 |
) |
Increase in other assets |
|
|
(2,687 |
) |
|
|
(2,630 |
) |
Decrease in accounts payable and accrued expenses |
|
|
(20,642 |
) |
|
|
(21,157 |
) |
Decrease in income taxes payable |
|
|
(1,288 |
) |
|
|
(2,968 |
) |
Increase (decrease) in other liabilities |
|
|
120 |
|
|
|
(1,088 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
50,813 |
|
|
|
143,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(47,552 |
) |
|
|
(90,394 |
) |
Net assets acquired, net of cash |
|
|
— |
|
|
|
(68,253 |
) |
Purchases of available-for-sale investments |
|
|
(197,920 |
) |
|
|
(277,480 |
) |
Proceeds from sales of available-for-sale investments |
|
|
80,420 |
|
|
|
277,480 |
|
Investment in trademarks, tradenames and other assets |
|
|
(913 |
) |
|
|
(91 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(165,965 |
) |
|
|
(158,738 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
|
7,583 |
|
|
|
6,323 |
|
Deferred financing costs |
|
|
(100 |
) |
|
|
— |
|
Cash dividends paid |
|
|
(8,072 |
) |
|
|
(9,186 |
) |
Tax payments related to vested restricted stock and deferred stock units |
|
|
(670 |
) |
|
|
(2,207 |
) |
Excess tax benefits from stock-based compensation |
|
|
1,931 |
|
|
|
3,402 |
|
Purchase of treasury stock |
|
|
(11,512 |
) |
|
|
(78,080 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(10,840 |
) |
|
|
(79,748 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes |
|
|
859 |
|
|
|
18,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
(125,133 |
) |
|
|
(77,163 |
) |
Balance at beginning of period |
|
|
200,226 |
|
|
|
179,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
75,093 |
|
|
$ |
102,531 |
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
4
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Significant Accounting Policies
Basis of Presentation — The condensed consolidated financial statements herein include the
accounts of The Men’s Wearhouse, Inc. and its subsidiaries (the “Company”) and have been prepared
without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the
“SEC”). As applicable under such regulations, certain information and footnote disclosures have
been condensed or omitted. We believe that the presentation and disclosures herein are adequate to
make the information not misleading, and the condensed consolidated financial statements reflect
all elimination entries and normal adjustments which are necessary for a fair presentation of the
financial position, results of operations and cash flows at the dates and for the periods
presented. These condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and accompanying notes included in our Annual Report on Form
10-K for the year ended February 3, 2007.
The preparation of the condensed consolidated financial statements in conformity with
accounting principals generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts and related disclosures. Actual amounts could
differ from those estimates.
Stock Based Compensation — Compensation cost resulting from all share-based payment
transactions is recognized in the financial statements. The amount of compensation cost is
measured based on the grant-date fair value of the instrument issued and is recognized over the
vesting period. Stock-based compensation expense recognized for the nine months ended October 28,
2006 and November 3, 2007 was $5.1 million and $6.1 million, respectively. Excess tax benefits
realized from the exercise of stock-based compensation was $1.9 million and $3.4 million for the
nine months ended October 28, 2006 and November 3, 2007, respectively. Refer to Note 10 for
additional disclosures regarding stock-based compensation.
Recently Issued Accounting Pronouncements — In June 2006, the Financial Accounting Standards
Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in a Company’s financial statements in accordance with FASB
No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement
attribute for a tax position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition. Differences between the amounts recognized in the statements of
financial position prior to the adoption of FIN 48 and the amounts reported after adoption are to
be accounted for as an adjustment to the beginning balance of retained earnings. We adopted the
provisions of FIN 48 at the beginning of fiscal 2007 and recognized a $1.1 million increase to our
reserve for uncertain tax positions. The increase is recorded as a cumulative effect adjustment to
retained earnings. At the adoption date of February 4, 2007, we had $17.5 million of unrecognized
tax benefits, $12.6 million of which would affect the effective tax rate if recognized. During the
quarter ended August 4, 2007, we concluded certain income tax audits and recognized $2.8 million of
previously unrecognized tax benefits, $1.4 million of which was accrued interest. The amount of
the recognized benefit that affected the effective tax rate was $2.3 million. During the quarter
ended November 3, 2007, we did not have any material changes to its uncertain tax positions.
Interest and penalties related to uncertain tax positions are recognized in income tax
expense. As of the adoption date of February 4, 2007, we had approximately $4.5 million of accrued
interest related to uncertain tax positions.
Tax years 2002-2006 remain open to examination by several taxing jurisdictions. Our major
taxing jurisdictions are the United States and Canada.
5
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
In June 2006, the Emerging Issues Task Force (“EITF”) ratified its conclusion on EITF Issue
No. 06-02 “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement
No. 43,” “Accounting for Compensated Absences” (“EITF 06-02”). EITF 06-02 requires that
compensation expense associated with a sabbatical leave, or other similar benefit arrangement, be
accrued over the requisite service period during which an employee earns the benefit. We adopted
EITF 06-02 at the beginning of fiscal 2007 through a cumulative effect adjustment to retained
earnings. The adoption of EITF 06-02 resulted in an additional liability of $8.0 million,
additional deferred tax assets of $3.1 million, and a reduction to retained earnings of $4.9
million. We estimate the adoption of EITF 06-02 will result in additional pre-tax expenses of
approximately $1.0 million in fiscal 2007.
In June 2006, the EITF ratified its conclusion on EITF No. 06-03, “How Taxes Collected From
Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That Is, Gross versus Net Presentation),” (“EITF 06-03”). EITF 06-03 concluded that the
presentation of taxes assessed by a governmental authority that is directly imposed on a
revenue-producing transaction between a seller and a customer such as sales, use, value added and
certain excise taxes is an accounting policy decision that should be disclosed in a Company’s
financial statements. Additionally, companies that record such taxes on a gross basis should
disclose the amounts of those taxes in interim and annual financial statements for each period for
which an income statement is presented if those amounts are significant. The adoption of EITF
06-03 at the beginning of fiscal 2007 had no effect on our financial position, results of
operations or cash flows.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). This
statement defines fair value, establishes a framework for using fair value to measure assets and
liabilities, and expands disclosures about fair value measurements. The statement applies whenever
other statements require or permit assets or liabilities to be measured at fair value. SFAS 157 is
effective for fiscal years beginning after November 15, 2007. We are currently evaluating the
impact that the adoption of SFAS 157 will have on our financial position, results of operations and
cash flows.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets
and Financial Liabilities-Including an amendment of FASB Statement No. 115,” (“SFAS 159”). SFAS
159 provides companies with an option to measure certain financial instruments and other items at
fair value with changes in fair value reported in earnings. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. We are currently evaluating the impact that the adoption of
SFAS 159 will have on our financial position, results of operations and cash flows.
In June 2007, the EITF ratified its conclusion on EITF Issue No. 06-11 “Accounting for the
Income Tax Benefits of Dividends on Share-Based Payment Awards” (“EITF 06-11”). EITF 06-11
provides that tax benefits associated with dividends on share-based payment awards be recorded as a
component of additional paid-in capital. EITF 06-11 is effective, on a prospective basis, for
fiscal years beginning after December 15, 2007. We are currently evaluating the impact that the
adoption of EITF 06-11 will have on our financial position, results of operation and cash flows
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS
141R”). SFAS 141R establishes principles and requirements for how a company recognizes assets
acquired, liabilities assumed, contractual contingencies and contingent consideration measured at
fair value at the acquisition date. The Statement also establishes disclosure requirements which
will enable users to evaluate the nature and financial effect of the business combination. SFAS
141R is effective for fiscal years beginning after December 15, 2008. We are currently evaluating
the impact that the adoption of SFAS 141R will have on our financial position, results of operation
and cash flows.
In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated
Financial Statements — an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting
and reporting standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling
equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting
requirements that provide sufficient disclosures that clearly identify and distinguish between the
interest of the parent and the interest of the noncontrolling owners. SFAS 160 is effective for
fiscal years beginning after December 15, 2008. We do not expect the adoption of SFAS 160 to have
any impact on our financial position, results of operation or cash flows.
6
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
2. Acquisition
On April 9, 2007, we completed the acquisition of After Hours Formalwear, Inc (“After Hours”),
a men’s formalwear chain in the United States with 509 stores operating under After Hours
Formalwear and Mr. Tux store fronts. As a result of the acquisition of After Hours, the condensed
consolidated statement of earnings and condensed consolidated statement of cash flows for the nine
months ended November 3, 2007 include the results of operations and cash flows, respectively, of
After Hours beginning April 10, 2007. In addition, the condensed consolidated balance sheet as of
November 3, 2007 includes preliminary estimates of the fair values of the assets acquired and
liabilities assumed as of the acquisition date for After Hours. After Hours has a preferred
relationship with David’s Bridal, Inc., the nation’s largest bridal retailer. This preferred
relationship also includes all Men’s Wearhouse tuxedo operations. We expect to rebrand the After
Hours operations and to realize future cost synergies resulting from the consolidation of central
functions, division integrations and the adoption of best practices across the combined operations
during fiscal 2007.
Under the terms of the stock purchase agreement, we acquired all of the outstanding stock of
After Hours from Federated Department Stores, Inc. in exchange for an aggregate purchase price of
$100.0 million, adjusted for certain items, primarily customer cash deposits retained by Federated
on rentals to be completed after closing. The total net cash consideration paid after these
adjustments and other acquisition costs was approximately $69.9 million.
We have not completed our assessment of the fair values of the acquired After Hours assets and
liabilities and we have not finalized the integration of the acquired After Hours operations with
our other tuxedo operations. Until such time, the allocation of the purchase price is subject to
revisions.
The following table summarizes the estimated fair values of the non-cash assets and
liabilities assumed at the date of acquisition (in thousands):
| |
|
|
|
|
| |
|
As of |
|
| |
|
April 9, |
|
| |
|
2007 |
|
Current non-cash assets |
|
$ |
35,229 |
|
Property and equipment |
|
|
60,421 |
|
Tuxedo rental product |
|
|
28,863 |
|
Goodwill |
|
|
10,527 |
|
Intangible assets |
|
|
7,946 |
|
Other assets |
|
|
1,500 |
|
|
|
|
|
Total assets acquired |
|
|
144,486 |
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
65,775 |
|
Other liabilities |
|
|
8,848 |
|
|
|
|
|
Total liabilities assumed |
|
|
74,623 |
|
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
$ |
69,863 |
|
|
|
|
|
Acquired intangible assets consist primarily of favorable leases which are amortized over the
remaining lease terms, ranging from one to 10 years.
7
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
The following pro forma information presents the Company’s net sales, net earnings and
earnings per share as if the After Hours acquisition had occurred on January 29, 2006, after giving
effect to certain purchase accounting adjustments (in thousands, except per share amounts).
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Three |
|
For the Nine |
|
For the Nine |
| |
|
Months Ended |
|
Months Ended |
|
Months Ended |
| |
|
October 28, |
|
October 28, |
|
November 3, |
| |
|
2006 |
|
2006 |
|
2007 |
Total net sales |
|
$ |
501,366 |
|
|
$ |
1,533,053 |
|
|
$ |
1,607,580 |
|
Net earnings |
|
$ |
38,225 |
|
|
$ |
105,718 |
|
|
$ |
123,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.72 |
|
|
$ |
1.99 |
|
|
$ |
2.31 |
|
Diluted |
|
$ |
0.70 |
|
|
$ |
1.93 |
|
|
$ |
2.28 |
|
This pro forma information is not necessarily indicative of actual results had the acquisition
occurred on January 29, 2006, nor is it necessarily indicative of future results, and does not
reflect potential synergies, integration costs, or other such costs or savings. In addition, the
tuxedo rental business is heavily concentrated in the months of April, May, and June. Second
quarter, followed by the third quarter, is the highest revenue quarter for the tuxedo rental
business and first and fourth quarters are considered off season.
3. Earnings per Share
Basic EPS is computed using the weighted average number of common shares outstanding during
the period and net earnings. Diluted EPS gives effect to the potential dilution which would have
occurred if additional shares were issued for stock options exercised under the treasury stock
method, as well as the potential dilution that could occur if our contingent convertible debt or
other contracts to issue common stock were converted or exercised. Our convertible debt was
redeemed, at our election, during the fourth quarter of 2006. Refer to Note 8 of Notes to
Condensed Consolidated Financial Statements. The following table reconciles basic and diluted
weighted average common shares outstanding and the related net earnings per share (in thousands,
except per share amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Three Months |
|
|
For the Nine Months |
|
| |
|
Ended |
|
|
Ended |
|
| |
|
October 28, |
|
|
November 3, |
|
|
October 28, |
|
|
November 3, |
|
| |
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
Net earnings |
|
$ |
31,774 |
|
|
$ |
37,067 |
|
|
$ |
96,251 |
|
|
$ |
132,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
|
53,098 |
|
|
|
53,141 |
|
|
|
53,163 |
|
|
|
53,614 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes |
|
|
1,023 |
|
|
|
— |
|
|
|
781 |
|
|
|
— |
|
Stock options and equity-based compensation |
|
|
782 |
|
|
|
634 |
|
|
|
771 |
|
|
|
670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding |
|
|
54,903 |
|
|
|
53,775 |
|
|
|
54,715 |
|
|
|
54,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.60 |
|
|
$ |
0.70 |
|
|
$ |
1.81 |
|
|
$ |
2.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.58 |
|
|
$ |
0.69 |
|
|
$ |
1.76 |
|
|
$ |
2.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
4. Dividends
A quarterly cash dividend of $0.05 per share was paid during each of the quarters ended April
29, 2006, July 29, 2006, October 28, 2006 and May 5, 2007. A quarterly cash dividend of $0.06 per
share was paid during each of the quarters ended August 4, 2007 and November 3, 2007. Cash
dividends paid were approximately $8.1 and $9.2 million during the nine months ended October 28,
2006 and November 3, 2007, respectively.
In October 2007, our Board of Directors declared a quarterly cash dividend of $0.06 per share
payable on December 28, 2007 to shareholders of record at the close of business on December 18,
2007. The dividend payout is estimated to be approximately $3.2 million and is included in accrued
expenses as of November 3, 2007.
5. Accounting For Derivative Instruments and Hedging
In connection with our direct sourcing program, we may enter into purchase commitments that
are denominated in a foreign currency (primarily the Euro). Our policy is to enter into foreign
currency forward exchange contracts to minimize foreign currency exposure related to forecasted
purchases of certain inventories. Under Statement of Financial Accounting Standards No. 133,
“Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), such contracts
have been designated as and accounted for as cash flow hedges. The settlement terms of the forward
contracts, including amount, currency and maturity, correspond with payment terms for the
merchandise inventories. Any ineffective portion (arising from the change in the difference
between the spot rate and the forward rate) of a hedge is reported in earnings immediately. We had
no contracts outstanding at October 28, 2006 and November 3, 2007, respectively.
The changes in the fair value of the foreign currency forward exchange contracts are matched
to inventory purchases by period and are recognized in earnings as such inventory is sold. The
fair value of the forward exchange contracts is estimated by comparing the cost of the foreign
currency to be purchased under the contracts using the exchange rates obtained under the contracts
(adjusted for forward points) to the hypothetical cost using the spot rate at quarter end.
9
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
6. Comprehensive Income and Supplemental Cash Flows
Our comprehensive income is as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Three Months |
|
|
For the Nine Months |
|
| |
|
Ended |
|
|
Ended |
|
| |
|
October 28, |
|
|
November 3, |
|
|
October 28, |
|
|
November 3, |
|
| |
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
Net earnings |
|
$ |
31,774 |
|
|
$ |
37,067 |
|
|
$ |
96,251 |
|
|
$ |
132,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in derivative fair value, net of tax |
|
|
(3 |
) |
|
|
— |
|
|
|
19 |
|
|
|
— |
|
Currency translation adjustments, net of tax |
|
|
1,049 |
|
|
|
15,865 |
|
|
|
2,112 |
|
|
|
28,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
32,820 |
|
|
$ |
52,932 |
|
|
$ |
98,382 |
|
|
$ |
160,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We paid cash during the first nine months of 2006 of $7.1 million for interest and $60.2
million for income taxes, compared with $3.5 million for interest and $77.1 million for income
taxes during the first nine months of 2007. We had non-cash investing and financing activities
resulting from the tax benefit recognized upon exercise of stock-based compensation of $3.1 million
and $4.2 million for the first nine months of 2006 and 2007, respectively. We had non-cash
investing and financing activities resulting from the issuance of treasury stock to the employee
stock ownership plan of $2.0 million and $2.5 million for the first nine months of 2006 and 2007,
respectively. We had non-cash investing and financing activities resulting from cash dividends
declared of $2.7 million and $3.2 million for the first nine months of 2006 and 2007, respectively.
We had net assets acquired, net of cash, of $69.9 million in the nine months ended November 3,
2007. The fair value of non-cash assets assumed was $144.5 million and the fair value of
liabilities assumed was $74.6 million.
We had capital expenditure purchases accrued in accounts payable and accrued expenses of
approximately $10.9 million at November 3, 2007.
7. Goodwill and Other Intangible Assets
Changes in the net carrying amount of goodwill for the year ended February 3, 2007 and for the
nine months ended November 3, 2007 are as follows (in thousands):
| |
|
|
|
|
Balance January 28, 2006 |
|
$ |
57,601 |
|
Translation adjustment |
|
|
(734 |
) |
|
|
|
|
Balance, February 3, 2007 |
|
$ |
56,867 |
|
Translation adjustment |
|
|
6,280 |
|
Goodwill of acquired business |
|
|
10,527 |
|
|
|
|
|
Balance, November 3, 2007 |
|
$ |
73,674 |
|
|
|
|
|
10
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
The goodwill of acquired business resulted from our April 9, 2007 acquisition of After Hours,
a men’s formalwear chain in the United States with 509 stores operating under After Hours
Formalwear and Mr. Tux store fronts. Refer to Note 2 of Notes to Condensed Consolidated Financial
Statements.
The gross carrying amount and accumulated amortization of our other intangibles, which are
included in other assets in the accompanying balance sheet, are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
October 28, |
|
|
November 3, |
|
|
February 3, |
|
| |
|
2006 |
|
|
2007 |
|
|
2007 |
|
Trademarks, tradenames and other intangibles |
|
$ |
9,316 |
|
|
$ |
15,712 |
|
|
$ |
9,316 |
|
Accumulated amortization |
|
|
(4,192 |
) |
|
|
(5,864 |
) |
|
|
(4,418 |
) |
|
|
|
|
|
|
|
|
|
|
Net total |
|
$ |
5,124 |
|
|
$ |
9,848 |
|
|
$ |
4,898 |
|
|
|
|
|
|
|
|
|
|
|
The pretax amortization expense associated with intangible assets totaled approximately
$671,000 and $1,517,000 for the nine months ended October 28, 2006 and November 3, 2007,
respectively, and approximately $897,000 for the year ended February 3, 2007. Pretax amortization
associated with intangible assets at November 3, 2007 is estimated to be $0.9 million for the
remainder of fiscal year 2007, $2.1 million for fiscal year 2008, $1.9 million for fiscal year
2009, $1.4 million for fiscal year 2010 and $1.0 million for fiscal year 2011.
8. Long-Term Debt
On December 21, 2005, we entered into an Amended and Restated Credit Agreement with a group of
banks to amend and restate our revolving credit facility. On February 2, 2007, we entered into an
Agreement and Amendment to the Credit Agreement effective as of January 31, 2007. The Amendment
(i) extends the maturity date of the revolving credit facility under the Credit Agreement to
February 11, 2012 and (ii) increases the total senior secured revolving credit facility under the
Credit Agreement from $100.0 million to $200.0 million, which can be expanded to $250.0 million
upon additional lender commitments. The Credit Agreement also provided our Canadian subsidiaries
with a senior secured term loan used to fund the repatriation of US$74.7 million of Canadian
earnings in January 2006 under the American Jobs Creation Act of 2004. The Canadian term loan
matures on February 10, 2011. The Credit Agreement is secured by the stock of certain of the
Company’s subsidiaries. The Credit Agreement has several borrowing and interest rate options
including the following indices: (i) an alternate base rate (equal to the greater of the prime rate
or the federal funds rate plus 0.5%) or (ii) LIBO rate or (iii) CDO rate. Advances under the
Credit Agreement bear interest at a rate per annum using the applicable indices plus a varying
interest rate margin up to 1.125%. The Credit Agreement also provides for fees applicable to
unused commitments ranging from 0.100% to 0.175%. The effective interest rate for the Canadian
term loan was 5.5% at November 3, 2007. As of November 3, 2007, there were no borrowings
outstanding under the revolving credit facility and there was US$92.6 million outstanding under the
Canadian term loan.
The Credit Agreement contains certain restrictive and financial covenants, including the
requirement to maintain certain financial ratios. The restrictive provisions in the Credit
Agreement have been modified to afford us with greater operating flexibility than was provided for
in our previous facility and to reflect an overall covenant structure that is generally
representative of a commercial loan made to an investment-grade company. Our debt, however, is not
rated, and we have not sought, and are not seeking, a rating of our debt. We were in compliance
with the covenants in the Credit Agreement as of November 3, 2007.
On October 21, 2003, we issued $130.0 million of 3.125% Convertible Senior Notes due 2023 in a
private placement. Interest on the Notes was payable semi-annually on April 15 and October 15 of
each year, beginning on April 15, 2004. The Notes were scheduled to mature on October 15, 2023.
However, we had the right to redeem the Notes between October 20, 2006 and October 19, 2008 if the
price of our common stock reached certain levels.
11
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
During certain periods, the Notes were convertible by holders into shares of our common stock
at a conversion rate of 35.1309 shares of common stock per $1,000 principal amount of Notes, which
was equivalent to a conversion price of $28.47 per share of common stock (subject to adjustment in
certain events), under the following circumstances: (1) if the closing sale price of our common
stock issuable upon conversion exceeded 120% of the conversion price under specified
conditions; (2) if we called the Notes for redemption; or (3) upon the occurrence of
specified corporate transactions.
Upon conversion of the Notes, in lieu of delivering common stock we could, at our election,
deliver cash or a combination of cash and common stock. However, on January 28, 2005, we entered
into a supplemental indenture relating to the Notes and irrevocably elected to settle the principal
amount at issuance of such Notes in 100% cash when they become convertible and are surrendered by
the holders thereof. The Notes were general senior unsecured obligations, ranking on parity in
right of payment with all our existing and future unsecured senior indebtedness and our other
general unsecured obligations, and senior in right of payment with all our future subordinated
indebtedness. The Notes were effectively subordinated to all of our senior secured indebtedness
and all indebtedness and liabilities of our subsidiaries.
On November 16, 2006, we issued a press release announcing that, as a result of the closing
sale price of the Company’s common stock exceeding 140% of the conversion price for the requisite
number of days during the requisite period, we had elected to redeem the full $130.0 million
aggregate principal amount of the Notes. Holders of the Notes had the right to convert their notes
at any time prior to two business days immediately preceding the redemption date. As indicated
above, we had irrevocably elected to settle the principal amount at issuance of the Notes in cash
when and if surrendered for conversion. Under the terms governing the Notes, holders of
approximately $127.0 million principal amount of the Notes exercised their conversion right in lieu
of having their notes redeemed and we exercised our right to pay cash for the principal amount of
the Notes converted in lieu of issuing common stock. The market value of the common stock to be
issued upon conversion that exceeded the principal amount was paid by delivering common stock. As
a result, we paid approximately $127.0 million in cash and issued 1,222,364 shares of the Company’s
common stock pursuant to the requested conversions. The remaining $3.0 million principal amount of
the Notes was redeemed on December 15, 2006 with such payment and accrued and unpaid interest being
made in cash. Notes converted into common stock prior to the redemption date were not entitled to
receive accrued and unpaid interest. In connection with the conversion and redemption of the
Notes, we paid approximately $130.1 million in cash, issued 1,222,364 shares of the Company’s
common stock and wrote-off approximately $1.3 million of unamortized deferred financing costs.
We utilize letters of credit primarily to secure inventory purchases. At November 3, 2007,
letters of credit totaling approximately $13.5 million were issued and outstanding.
12
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
9. Treasury Stock
As of November 3, 2007, we had 16,935,760 shares held in treasury stock. A reconciliation of
our treasury shares for the year ended February 3, 2007 and for the nine months ended November 3,
2007 is provided below:
| |
|
|
|
|
| |
|
Treasury |
| |
|
Shares |
Balance, January 28, 2006 |
|
|
14,169,241 |
|
Treasury stock issued to profit sharing plan |
|
|
(68,564 |
) |
Purchases of treasury stock |
|
|
1,134,000 |
|
|
|
|
|
|
Balance, February 3, 2007 |
|
|
15,234,677 |
|
Shares received in lieu of tax withholding payments |
|
|
8,290 |
|
Treasury stock issued to profit sharing plan |
|
|
(65,207 |
) |
Purchases of treasury stock |
|
|
1,758,000 |
|
|
|
|
|
|
Balance, November 3, 2007 |
|
|
16,935,760 |
|
|
|
|
|
|
In January 2006, the Board of Directors authorized a $100.0 million share repurchase program
of our common stock. This authorization superceded any remaining previous authorizations. As of
October 28, 2006, a total of 369,400 shares at a cost of $11.5 million were purchased in open
market transactions under this program at an average price per share of $31.16. In August 2007,
the Company’s Board of Directors approved a replenishment of the Company’s share repurchase program
to $100 million by authorizing $90.3 million to be added to the remaining $9.7 million of the then
current program. During the first nine months of 2007, 1,063,200 shares at a cost of $50.1 million
were purchased in open market transactions under the January 2006 authorization at an average price
of $47.08 and 694,800 shares at a cost of $28.0 million were purchased in open market transactions
under the August 2007 authorization at an average price of $40.34. At November 3, 2007, the
remaining balance available under the August 2007 replenishment was $72.0 million.
The following table summarizes our treasury stock repurchases (in thousands, except share data
and average price per share):
| |
|
|
|
|
|
|
|
|
| |
|
For the Nine Months Ended |
| |
|
October 28, |
|
November 3, |
| |
|
2006 |
|
2007 |
Shares repurchased |
|
|
369,400 |
|
|
|
1,758,000 |
|
Total costs |
|
$ |
11,512 |
|
|
$ |
78,080 |
|
Average price per share |
|
$ |
31.16 |
|
|
$ |
44.41 |
|
13
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
10. Stock-Based Compensation Plans
Stock Plans
We have adopted the 1996 Long-Term Incentive Plan (formerly known as the 1996 Stock Option
Plan) which, as amended, provides for an aggregate of up to 2,775,000 shares of our common stock
(or the fair market value there of) with respect to which stock options, stock appreciation rights,
restricted stock, deferred stock units and performance based awards may be granted to full-time key
employees (excluding certain officers); the 1998 Key Employee Stock Option Plan which, as amended,
provides for the grant of options to purchase up to 3,150,000 shares of our common stock to
full-time key employees (excluding certain officers); and the 2004 Long-Term Incentive Plan which
provides for an aggregate of up to 900,000 shares of our common stock (or the fair market value
there of) with respect to which stock options, stock appreciation rights, restricted stock,
deferred stock units and performance based awards may be granted to full-time key employees. Each
of the plans will expire at the end of ten years following the effective date of such plan unless
extended by amendment; no awards may be granted pursuant to the plans after the expiration date.
The 1996 Plan will expire March 29, 2014, ten years following its amended and restated effective
date. In fiscal 1992, we also adopted a Non-Employee Director Stock Option Plan which, as amended,
provides for an aggregate of up to 251,250 shares of our common stock with respect to which stock
options, stock appreciation rights or restricted stock awards may be granted to non-employee
directors of the Company. In fiscal 2001, the Director Plan’s termination date was extended to
February 23, 2012. Options granted under these plans must be exercised within ten years of the
date of grant.
Generally, options granted pursuant to the employee plans vest at the rate of 1/3 of the
shares covered by the grant on each of the first three anniversaries of the date of grant.
However, a significant portion of options granted under these Plans vest annually in varying
increments over a period from one to ten years. Under the 1996 Plan and the 2004 Plan, options may
not be issued at a price less than 100% of the fair market value of our stock on the date of grant.
Under the 1996 Plan and the 2004 Plan, the vesting, transferability restrictions and other
applicable provisions of any stock appreciation rights, restricted stock, deferred stock units or
performance based awards will be determined by the Compensation Committee of the Company’s Board of
Directors. Options granted under the Director Plan vest one year after the date of grant and are
issued at a price equal to the fair market value of our stock on the date of grant; provided,
however, that the committee who administers the Director Plan may elect to grant stock appreciation
rights, having such terms and conditions as the committee determines, in lieu of any option grant.
Restricted stock awards granted under the Director Plan vest one year after the date of grant.
Grants of deferred stock units generally vest over a three year period; however, certain grants
vest annually at varying increments over a period up to seven years.
Stock Options
The following table summarizes stock option activity for the nine months ended November 3,
2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
| |
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
|
|
| |
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
| |
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
| Options |
|
Shares |
|
|
Price |
|
|
Term |
|
|
Value (000’s) |
|
Outstanding at February 3, 2007 |
|
|
1,434,016 |
|
|
$ |
15.81 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,500 |
|
|
|
47.18 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(300,619 |
) |
|
|
15.62 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(108,898 |
) |
|
|
21.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at November 3, 2007 |
|
|
1,025,999 |
|
|
$ |
15.29 |
|
|
4.9 years |
|
$ |
25,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at November 3, 2007 |
|
|
435,008 |
|
|
$ |
14.90 |
|
|
4.0 years |
|
$ |
11,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
No stock options were granted during the nine months ended October 28, 2006. For the nine
months ended November 3, 2007, 1,500 stock options were granted, at a weighted-average fair value
of $19.43. The fair value of the options is estimated on the date of grant using the Black-Scholes
option pricing model. The following weighted average assumptions were used for grants during the
nine months ended November 3, 2007: expected volatility of 40.37%, risk-free interest rates (U.S.
Treasury five year notes) of 4.63%, dividend yield of 0.46% and an expected life of five years.
The total intrinsic value of options exercised during the nine months ended October 28, 2006 and
November 3, 2007 was $7.7 million and $9.6 million, respectively. As of November 3, 2007, we have
unrecognized compensation expense related to nonvested stock options of approximately $2.5 million
which is expected to be recognized over a weighted average period of 3.1 years.
Restricted Stock and Deferred Stock Units
The following table summarizes restricted stock and deferred stock unit activity for the nine
months ended November 3, 2007:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted- |
| |
|
|
|
|
|
Average |
| |
|
|
|
|
|
Grant-Date |
| Nonvested Shares |
|
Shares |
|
Fair Value |
Nonvested at February 3, 2007 |
|
|
513,702 |
|
|
$ |
28.69 |
|
Granted |
|
|
100,664 |
|
|
|
47.19 |
|
Vested |
|
|
(145,647 |
) |
|
|
29.56 |
|
Forfeited |
|
|
(8,053 |
) |
|
|
36.22 |
|
|
|
|
|
|
|
|
|
|
Nonvested at November 3, 2007 |
|
|
460,666 |
|
|
$ |
33.44 |
|
|
|
|
|
|
|
|
|
|
For the nine months ended October 28, 2006, we granted 83,252 deferred stock units at a
weighted-average grant date fair value of $35.31. For the nine months ended November 3, 2007, we
granted 100,664 restricted stock and deferred stock units at a weighted-average grant date fair
value of $47.19. As of November 3, 2007, we have unrecognized compensation expense related to
nonvested restricted stock and deferred stock units of approximately $9.1 million which is expected
to be recognized over a weighted average period of 2.5 years. The total fair value of shares
vested during the nine months ended October 28, 2006 and November 3, 2007 was $2.4 million and $6.5
million, respectively. During the nine months ended November 3, 2007, 19,360 restricted stock
shares vested and 1,500 restricted stock shares were granted at an average grant price of $47.18.
No shares of restricted stock were forfeited during the nine months ended November 3, 2007. Total
nonvested shares of 460,666 at November 3, 2007 included 87,940 nonvested restricted stock shares.
15
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Employee Stock Purchase Plan
In 1998, we adopted an Employee Stock Discount Plan which allows employees to authorize
after-tax payroll deductions to be used for the purchase of up to 2,137,500 shares of our common
stock at 85% of the lesser of the fair market value on the first day of the offering period or the
fair market value on the last day of the offering period. We make no contributions to this plan
but pay all brokerage, service and other costs incurred. Effective for offering periods beginning
July 1, 2002, the plan was amended so that a participant may not purchase more than 125 shares
during any calendar quarter.
During the nine months ended October 28, 2006, employees purchased 48,084 shares under the
ESDP, the weighted-average fair value of which was $26.28 per share. During the nine months ended
November 3, 2007, employees purchased 42,256 shares under the ESDP, the weighted-average fair value
of which was $38.48 per share. We recognized approximately $0.6 million of stock-based
compensation expense related to the ESDP for the nine months ended November 3, 2007. As of
November 3, 2007, 1,488,359 shares were reserved for future issuance under the ESDP.
11. Legal Matters
We are involved in various routine legal proceedings, including ongoing litigation, incidental
to the conduct of our business. Management believes that none of these matters will have a
material adverse effect on our financial position, results of operations or cash flows.
12. Supplemental Sales Information (in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
| |
|
October 28, |
|
|
November 3, |
|
|
October 28, |
|
|
November 3, |
|
| |
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Men’s tailored clothing product |
|
$ |
189,905 |
|
|
$ |
201,435 |
|
|
$ |
597,180 |
|
|
$ |
620,044 |
|
Men’s non-tailored clothing product |
|
|
159,026 |
|
|
|
163,297 |
|
|
|
486,232 |
|
|
|
508,428 |
|
Ladies clothing product |
|
|
15,597 |
|
|
|
14,775 |
|
|
|
47,148 |
|
|
|
50,759 |
|
Corporate uniform product |
|
|
1,881 |
|
|
|
4,657 |
|
|
|
5,199 |
|
|
|
11,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total clothing product |
|
|
366,409 |
|
|
|
384,164 |
|
|
|
1,135,759 |
|
|
|
1,190,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tuxedo rentals |
|
|
34,486 |
|
|
|
96,090 |
|
|
|
104,401 |
|
|
|
290,521 |
|
Alteration services |
|
|
24,511 |
|
|
|
26,580 |
|
|
|
71,217 |
|
|
|
80,699 |
|
Retail dry cleaning services |
|
|
4,662 |
|
|
|
5,302 |
|
|
|
13,842 |
|
|
|
16,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tuxedo rental, alteration
and other services |
|
|
63,659 |
|
|
|
127,972 |
|
|
|
189,460 |
|
|
|
387,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
430,068 |
|
|
$ |
512,136 |
|
|
$ |
1,325,219 |
|
|
$ |
1,577,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales by brand: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MW (including After Hours from
April 10, 2007) |
|
$ |
280,324 |
|
|
$ |
354,042 |
|
|
$ |
859,512 |
|
|
$ |
1,073,031 |
|
K&G |
|
|
89,906 |
|
|
|
87,656 |
|
|
|
288,215 |
|
|
|
298,842 |
|
Moores |
|
|
53,295 |
|
|
|
60,479 |
|
|
|
158,451 |
|
|
|
178,578 |
|
MW Cleaners |
|
|
4,662 |
|
|
|
5,302 |
|
|
|
13,842 |
|
|
|
16,098 |
|
Twin Hill |
|
|
1,881 |
|
|
|
4,657 |
|
|
|
5,199 |
|
|
|
11,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
430,068 |
|
|
$ |
512,136 |
|
|
$ |
1,325,219 |
|
|
$ |
1,577,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
For supplemental information, it is suggested that “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” be read in conjunction with the corresponding
section included in our Annual Report on Form 10-K for the year ended February 3, 2007. References
herein to years are to our 52-week or 53-week fiscal year which ends on the Saturday nearest
January 31 in the following calendar year. For example, references to “2007” mean the 52-week
fiscal year ending February 2, 2008.
The following table presents information with respect to retail apparel stores in operation
during each of the respective fiscal periods:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
For the Year |
| |
|
For the Three Months Ended |
|
For the Nine Months Ended |
|
Ended |
| |
|
October 28, |
|
November 3, |
|
October 28, |
|
November 3, |
|
February 3, |
| |
|
2006 |
|
2007 |
|
2006 |
|
2007 |
|
2007 |
Stores open at beginning of
period: |
|
|
735 |
|
|
|
1,269 |
|
|
|
719 |
|
|
|
752 |
|
|
|
719 |
|
Opened |
|
|
8 |
|
|
|
15 |
|
|
|
26 |
|
|
|
35 |
|
|
|
35 |
|
Acquired |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
509 |
|
|
|
— |
|
Closed |
|
|
— |
|
|
|
(12 |
) |
|
|
(2 |
) |
|
|
(24 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores open at end of period |
|
|
743 |
|
|
|
1,272 |
|
|
|
743 |
|
|
|
1,272 |
|
|
|
752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores open at end of period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Men’s Wearhouse |
|
|
538 |
|
|
|
560 |
|
|
|
538 |
|
|
|
560 |
|
|
|
543 |
|
After Hours |
|
|
— |
|
|
|
493 |
|
|
|
— |
|
|
|
493 |
|
|
|
— |
|
K&G |
|
|
89 |
|
|
|
103 |
|
|
|
89 |
|
|
|
103 |
|
|
|
93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
627 |
|
|
|
1,156 |
|
|
|
627 |
|
|
|
1,156 |
|
|
|
636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moores |
|
|
116 |
|
|
|
116 |
|
|
|
116 |
|
|
|
116 |
|
|
|
116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
743 |
|
|
|
1,272 |
|
|
|
743 |
|
|
|
1,272 |
|
|
|
752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On April 9, 2007, we completed the acquisition of After Hours, a men’s formalwear chain in the
United States with 509 stores operating under After Hours Formalwear and Mr. Tux store fronts. As
a result of the acquisition of After Hours, the condensed consolidated statement of earnings and
condensed consolidated statement of cash flows for the nine months ended November 3, 2007 include
the results of operations and cash flows, respectively, of After Hours beginning April 10, 2007.
In addition, the condensed consolidated balance sheet as of November 3, 2007 includes preliminary
estimates of the fair values of the assets acquired and liabilities assumed as of the acquisition
date for After Hours. After Hours has a preferred relationship with David’s Bridal, Inc., the
nation’s largest bridal retailer. This preferred relationship also includes all Men’s Wearhouse
tuxedo operations. We expect to rebrand the After Hours operations and to realize future cost
synergies resulting from the consolidation of central functions, division integrations and the
adoption of best practices across the combined operations during fiscal 2007.
Under the terms of the stock purchase agreement, we acquired all of the outstanding stock of
After Hours from Federated Department Stores, Inc. in exchange for an aggregate purchase price of
$100.0 million, adjusted for certain items, primarily customer cash deposits retained by Federated
on rentals to be completed after closing. The total net cash consideration paid after these
adjustments and other acquisition costs was approximately $69.9 million.
As of November 3, 2007, we are operating 33 retail dry cleaning and laundry facilities in the
Houston, Texas area. We may open or acquire additional facilities on a limited basis in 2007 as we
continue to test market and evaluate the feasibility of developing a national retail dry cleaning
and laundry line of business. In addition, we continue to pursue our corporate apparel and uniform
program by entering into contracts to provide corporate uniforms to our customers’ workforces. As
of November 3, 2007, we are servicing approximately eight contract customers.
17
Results of Operations
Three Months Ended October 28, 2006 and November 3, 2007
The Company’s net sales increased $82.1 million, or 19.1%, to $512.1 million for the quarter
ended November 3, 2007, due mainly to a $61.6 million increase in tuxedo rental revenues, a $17.8
million increase in clothing product sales and a $2.1 million increase in alteration service
revenues. The $82.1 million increase in net sales is attributable to the following:
| |
|
|
|
|
| ( in millions) |
|
Amount Attributed to |
| |
| $ |
60.6 |
|
|
Increase in net sales from acquired After Hours stores. |
| |
9.1 |
|
|
Increase from net sales of stores opened in 2006, relocated
stores and expanded stores not yet included in comparable
sales. |
| |
5.9 |
|
|
Increase from alteration and other sales. |
| |
(6.8 |
) |
|
2.1% decrease and 0.6% increase in comparable sales for US
and Canadian stores, respectively, in the third quarter of
2007 compared to the third quarter of 2006. |
| |
8.4 |
|
|
Net sales from 15 new stores opened in 2007. |
| |
(0.6 |
) |
|
Closed stores. |
| |
5.5 |
|
|
Effect of exchange rate changes. |
| $ |
82.1 |
|
|
Total |
Our Men’s Wearhouse comparable store sales (which are calculated by excluding the net sales of
a store for any month of one period if the store was not open throughout the same month of the
prior period) increased 0.6%, while our K&G comparable store sales decreased 11.3%. Our Men’s
Wearhouse comparable store sales increased due to continued growth in our tuxedo rental business.
The decrease in K&G comparable store sales was due mainly to a decrease in traffic levels and
unseasonably warm weather. In Canada, comparable store sales increased 0.6% primarily as a result
of continued growth in our tuxedo rental business. As a percentage of total revenues, combined
U.S. and Canadian tuxedo rental revenues increased from 8.0% in the third quarter of 2006 to 18.8%
in the third quarter of 2007. Our condensed consolidated financial statements include tuxedo
rental revenues of $56.9 million from After Hours since the acquisition date of April 9, 2007.
Gross margin increased 29.7% from the same prior year quarter to $240.5 million in the third
quarter of 2007. As a percentage of sales, gross margin increased from 43.1% in the third quarter
of 2006 to 47.0% in the third quarter of 2007. This increase in gross margin percentage resulted
mainly from improvements in clothing product margins from 55.6% in 2006 to 58.6% in 2007 related to
lower product costs and from continued growth in our tuxedo rental and other services margins from
54.9% in 2006 to 67.7% in 2007 due mainly to our acquisition of After Hours effective April 9,
2007. The increases in the clothing product and services gross margins were partially offset by an
increase from 12.4% to 13.9% from the third quarter of 2006 to the third quarter of 2007 for
occupancy cost, which is relatively constant on a per store basis and includes store related rent,
common area maintenance, utilities, repairs and maintenance, security, property taxes and
depreciation. On an absolute dollar basis, occupancy cost increased by 33.7% from the third
quarter of 2006 to the third quarter of 2007, due mainly to our acquisition of After Hours, higher
rent expense from our increased store count and renewals of existing leases at higher rates.
18
Selling, general and administrative expenses increased to $181.3 million in the third quarter
of 2007 from $136.6 million in the third quarter of 2006, an increase of $44.7 million or 32.7%.
As a percentage of sales, these expenses increased from 31.8% in the third quarter of 2006 to 35.4%
in the third quarter of 2007. The components of this 3.6% net increase in SG&A expenses as a
percentage of net sales were as follows:
| |
|
|
|
|
| % |
|
Attributed to |
| |
| |
(0.1 |
) |
|
Decrease in advertising expense as a percentage of sales from 3.5%
in the third quarter of 2006 to 3.4% in the third quarter of 2007.
On an absolute dollar basis, advertising expense increased $2.6
million. |
| |
1.2 |
|
|
Increase in store salaries as a percentage of sales from 13.1% in
the third quarter of 2006 to 14.3% in the third quarter of 2007.
Store salaries on an absolute dollar basis increased $16.5 million
primarily due to salary expense associated with After Hours and
increased base salaries. |
| |
2.5 |
|
|
Increase in other SG&A expenses as a percentage of sales from 15.2%
in the third quarter of 2006 to 17.7% in the third quarter of 2007.
On an absolute dollar basis, other SG&A expenses increased $25.6
million primarily due to expenses associated with After Hours,
continued growth in our tuxedo rental business, increase in base
salaries and increased warehouse and administrative occupancy costs. |
| |
3.6 |
% |
|
Total |
Interest expense decreased from $2.3 million in the third quarter of 2006 to $1.3 million in
the third quarter of 2007 while interest income decreased from $2.5 million in the third quarter of
2006 to $1.4 million in the third quarter of 2007. Weighted average borrowings outstanding
decreased from $207.3 million in the third quarter of 2006 to $85.4 million in the third quarter of
2007, and the weighted average interest rate on outstanding indebtedness increased from 3.9% to
5.9%. The decrease in weighted average borrowings and the increase in the weighted average
interest rate is due to our election to redeem our $130.0 million 3.125% Convertible Senior Notes
due 2023 in the fourth quarter of 2006. For additional information regarding the redemption of our
Notes, refer to Note 8 of Notes to Condensed Consolidated Financial Statements and the “Liquidity
and Capital Resources” discussion herein. The decrease in interest income primarily relates to
decreases in our average cash and short-term investment balances.
Our effective income tax rate was 35.0% for the third quarter of 2006 and 37.4% for the third
quarter of 2007. The effective tax rate in 2007 was higher than the statutory U.S. federal rate of
35% primarily due to the effect of state income taxes.
These factors resulted in net earnings of $37.1 million or 7.2% of net sales for the third
quarter of 2007, compared with net earnings of $31.8 million or 7.4% of net sales for the third
quarter of 2006.
19
Nine Months Ended October 28, 2006 and November 3, 2007
The Company’s net sales increased $252.4 million, or 19.0%, to $1,577.6 million for the nine
months ended November 3, 2007, due mainly to a $186.1 million increase in tuxedo rental revenues, a
$54.5 million increase in clothing product sales and a $9.5 million increase in alteration service
revenues and. The $252.4 million increase in net sales is attributable to the following:
| |
|
|
|
|
| ( in millions) |
|
Amount Attributed to |
| |
| $ |
176.0 |
|
|
Increase in net sales from acquired After Hours stores. |
| |
36.6 |
|
|
Increase from net sales of stores opened in 2006, relocated
stores and expanded stores not yet included in comparable
sales. |
| |
18.1 |
|
|
Increase from alteration and other sales. |
| |
0.1 |
|
|
(0.8)% decrease and 5.1% increase in comparable sales for
US and Canadian stores, respectively, for the nine months
ended November 3, 2007 |
| |
16.5 |
|
|
Net sales from 35 new stores opened in 2007. |
| |
(2.9 |
) |
|
Closed stores. |
| |
8.0 |
|
|
Effect of exchange rate changes. |
| $ |
252.4 |
|
|
Total |
Our Men’s Wearhouse comparable store sales increased 1.5%, while our K&G comparable store
sales decreased 8.0%. Our Men’s Wearhouse comparable store sales increased due to a slight
increase in traffic levels and continued growth in our tuxedo rental business. The decrease in K&G
comparable store sales was due mainly to a decrease in traffic levels and the cannibalization
effect from opening new stores. In Canada, comparable store sales increased 5.1% primarily as a
result of increased traffic levels, an improved average ticket and continued growth in our tuxedo
rental business. As a percentage of total revenues, combined U.S. and Canadian tuxedo rental
revenues increased from 7.9% in the first nine months of 2006 to 18.4% in the first nine months of
2007. Our condensed consolidated financial statements include tuxedo rental revenues of $165.5
million from After Hours since the acquisition date of April 9, 2007.
Gross margin increased $173.9 million or 30.7% over the same prior year period to $741.2
million for the first nine months of 2007. As a percentage of sales, gross margin increased from
42.8% in the first nine months of 2006 to 47.0% in the first nine months of 2007. This increase
in gross margin percentage resulted mainly from improvements in clothing product margins from 54.4%
in 2006 to 57.0% in 2007 related to lower product costs and from continued growth in our tuxedo
rental and other services margins from 54.6% in 2006 to 67.4% in 2007 due mainly to our acquisition
of After Hours effective April 9, 2007. The increases in the clothing product and services gross
margins were partially offset by an increase from 11.6% to 12.5% from the first nine months of 2006
to the first nine months of 2007 for occupancy cost, which is relatively constant on a per store
basis and includes store related rent, common area maintenance, utilities, repairs and maintenance,
security, property taxes and depreciation. On an absolute dollar basis, occupancy costs increased
by 28.1% from the first nine months of 2006 to the first nine months of 2007, due mainly to our
acquisition of After Hours, higher rent expense from our increased store count and renewals of
existing leases at higher rates. In addition, the increase in the gross margin percentage was
partially offset by a $3.6 million charge due to the elimination of under performing tuxedo rental
styles as a result of our strategy to establish a global merchandising assortment for the combined
tuxedo rental operations of After Hours and Men’s Wearhouse.
20
Selling, general and administrative expenses increased to $534.1 million in the first nine
months of 2007 from $416.6 million in the first nine months of 2006, an increase of $117.6 million
or 28.2%. As a percentage of sales, these expenses increased from 31.4% in the first nine months
of 2006 to 33.9% in the first nine months of 2007. The components of this 2.5% net increase in
SG&A expenses as a percentage of net sales were as follows:
| |
|
|
|
|
| % |
|
Attributed to |
| |
| |
(0.2 |
) |
|
Decrease in advertising expense as a percentage of sales from 3.4%
in the first nine months of 2006 to 3.2% in the first nine months of
2007. On an absolute dollar basis, advertising expense increased
$5.3 million. |
| |
0.8 |
|
|
Increase in store salaries as a percentage of sales from 12.8% in
the first nine months of 2006 to 13.6% in the first nine months of
2007. Store salaries on an absolute dollar basis increased $44.8
million primarily due to salary expense associated with After Hours
and increased commissions associated with higher sales and increased
base salaries. |
| |
1.9 |
|
|
Increase in other SG&A expenses as a percentage of sales from 15.2%
in the first nine months of 2006 to 17.1% in the first nine months
of 2007. On an absolute dollar basis, other SG&A expenses increased
$67.5 million primarily due to expenses associated with After Hours,
continued growth in our tuxedo rental business, increased base
salaries and increased warehouse and administrative occupancy costs,
partially offset by the receipt of proceeds of business interruption
insurance related to store closings in prior periods. |
| |
2.5 |
% |
|
Total |
Interest expense decreased from $6.8 million in the first nine months of 2006 to $3.5 million
in the first nine months of 2007 while interest income decreased from $7.2 million in the first
nine months of 2006 to $4.7 million in the first nine months of 2007. Weighted average borrowings
outstanding decreased from $207.3 million in the first nine months of 2007 to $80.5 million in the
first nine months of 2007, and the weighted average interest rate on outstanding indebtedness
increased from 3.8% to 5.4%. The decrease in weighted average borrowings and the increase in the
weighted average interest rate is due to our election to redeem our $130.0 million 3.125%
Convertible Senior Notes due 2023 in the fourth quarter of 2006. For additional information
regarding the redemption of our Notes, refer to Note 8 of Notes to Condensed Consolidated Financial
Statements and the “Liquidity and Capital Resources” discussion herein. The decrease in interest
income primarily relates to decreases in our average cash and short-term investment balances.
Our effective income tax rate was 36.3% for the first nine months of 2006 and 36.5% for the
first nine months of 2007. The effective tax rate in 2007 was higher than the statutory U.S.
federal rate of 35% primarily due to the effect of state income taxes, offset by favorable
developments in certain outstanding income tax matters in the second quarter of 2007.
These factors resulted in net earnings of $132.2 million or 8.4% of net sales for the first
nine months of 2007, compared with net earnings of $96.3 million or 7.3% of net sales for the first
nine months of 2006.
21
Liquidity and Capital Resources
On December 21, 2005, we entered into an Amended and Restated Credit Agreement with a group of
banks to amend and restate our revolving credit facility. On February 2, 2007, we entered into an
Agreement and Amendment to the Credit Agreement effective as of January 31, 2007. The Amendment
(i) extends the maturity date of the revolving credit facility under the Credit Agreement to
February 11, 2012 and (ii) increases the total senior secured revolving credit facility under the
Credit Agreement from $100.0 million to $200.0 million, which can be expanded to $250.0 million
upon additional lender commitments. The Credit Agreement also provided our Canadian subsidiaries
with a senior secured term loan used to fund the repatriation of US$74.7 million of Canadian
earnings in January 2006 under the American Jobs Creation Act of 2004. The Canadian term loan
matures on February 10, 2011. The Credit Agreement is secured by the stock of certain of the
Company’s subsidiaries. The Credit Agreement has several borrowing and interest rate options
including the following indices: (i) an alternate base rate (equal to the greater of the prime rate
or the federal funds rate plus 0.5%) or (ii) LIBO rate or (iii) CDO rate. Advances under the
Credit Agreement bear interest at a rate per annum using the applicable indices plus a varying
interest rate margin up to 1.125%. The Credit Agreement also provides for fees applicable to
unused commitments ranging from 0.100% to 0.175%. The effective interest rate for the Canadian
term loan was 5.5% at November 3, 2007. As of November 3, 2007, there were no borrowings
outstanding under the revolving credit facility and there was US$92.6 million outstanding under the
Canadian term loan.
The Credit Agreement contains certain restrictive and financial covenants, including the
requirement to maintain certain financial ratios. The restrictive provisions in the Credit
Agreement have been modified to afford us with greater operating flexibility than was provided for
in our previous facility and to reflect an overall covenant structure that is generally
representative of a commercial loan made to an investment-grade company. Our debt, however, is not
rated, and we have not sought, and are not seeking, a rating of our debt. We were in compliance
with the covenants in the Credit Agreement as of November 3, 2007.
On October 21, 2003, we issued $130.0 million of 3.125% Convertible Senior Notes due 2023 in a
private placement. Interest on the Notes was payable semi-annually on April 15 and October 15 of
each year, beginning on April 15, 2004. The Notes were scheduled to mature on October 15, 2023.
However, we had the right to redeem the Notes between October 20, 2006 and October 19, 2008 if the
price of our common stock reached certain levels.
During certain periods, the Notes were convertible by holders into shares of our common stock
at a conversion rate of 35.1309 shares of common stock per $1,000 principal amount of Notes, which
was equivalent to a conversion price of $28.47 per share of common stock (subject to adjustment in
certain events), under the following circumstances: (1) if the closing sale price of our common
stock issuable upon conversion exceeded 120% of the conversion price under specified
conditions; (2) if we called the Notes for redemption; or (3) upon the occurrence of
specified corporate transactions.
Upon conversion of the Notes, in lieu of delivering common stock we could, at our election,
deliver cash or a combination of cash and common stock. However, on January 28, 2005, we entered
into a supplemental indenture relating to the Notes and irrevocably elected to settle the principal
amount at issuance of such Notes in 100% cash when they become convertible and are surrendered by
the holders thereof. The Notes were general senior unsecured obligations, ranking on parity in
right of payment with all our existing and future unsecured senior indebtedness and our other
general unsecured obligations, and senior in right of payment with all our future subordinated
indebtedness. The Notes were effectively subordinated to all of our senior secured indebtedness
and all indebtedness and liabilities of our subsidiaries.
22
On November 16, 2006, we issued a press release announcing that, as a result of the closing
sale price of the Company’s common stock exceeding 140% of the conversion price for the requisite
number of days during the requisite period, we had elected to redeem the full $130.0 million
aggregate principal amount of the Notes. Holders of the Notes had the right to convert their notes
at any time prior to two business days immediately preceding the redemption date. As indicated
above, we had irrevocably elected to settle the principal amount at issuance of the Notes in cash
when and if surrendered for conversion. Under the terms governing the Notes, holders of
approximately $127.0 million principal amount of the Notes exercised their conversion right in lieu
of having their notes redeemed and we exercised our right to pay cash for the principal amount of
the Notes converted in lieu of issuing common stock. The market value of the common stock to be
issued upon conversion that exceeded the principal amount was paid by delivering common stock. As
a result, we paid approximately $127.0 million in cash and issued 1,222,364 shares of the Company’s
common stock pursuant to the requested conversions. The remaining $3.0 million principal amount of
the Notes was redeemed on December 15, 2006 with such payment and accrued and unpaid interest being
made in cash. Notes converted into common stock prior to the redemption date were not entitled to
receive accrued and unpaid interest. In connection with the conversion and redemption of the
Notes, we paid approximately $130.1 million in cash, issued 1,222,364 shares of the Company’s
common stock and wrote-off approximately $1.3 million of unamortized deferred financing costs.
We utilize letters of credit primarily to secure inventory purchases. At November 3, 2007,
letters of credit totaling approximately $13.5 million were issued and outstanding.
A quarterly cash dividend of $0.05 per share was paid during each of the quarters ended April
29, 2006, July 29, 2006, October 28, 2006 and May 5, 2007. A quarterly cash dividend of $0.06 per
share was paid during each of the quarters ended August 4, 2007 and November 3, 2007. Cash
dividends paid were approximately $8.1 and $9.2 million during the nine months ended October 28,
2006 and November 3, 2007, respectively.
In October 2007, our Board of Directors declared a quarterly cash dividend of $0.06 per share
payable on December 28, 2007 to shareholders of record at close of business on December 18, 2007.
The dividend payout is estimated to be approximately $3.2 million and is included in accrued
expenses as of November 3, 2007.
On April 9, 2007, we completed the acquisition of After Hours, a men’s formalwear chain in the
United States with 509 stores operating under After Hours Formalwear and Mr. Tux store fronts. As
a result of the acquisition of After Hours, the condensed consolidated statement of earnings and
condensed consolidated statement of cash flows for the nine months ended November 3, 2007 include
the results of operations and cash flows, respectively, of After Hours beginning April 10, 2007.
In addition, the condensed consolidated balance sheet as of November 3, 2007 includes preliminary
estimates of the fair values of the assets acquired and liabilities assumed as of the acquisition
date for After Hours. After Hours has a preferred relationship with David’s Bridal, Inc., the
nation’s largest bridal retailer. This preferred relationship also includes all Men’s Wearhouse
tuxedo operations. We expect to rebrand the After Hours operations and to realize future cost
synergies resulting from the consolidation of central functions, division integrations and the
adoption of best practices across the combined operations during fiscal 2007.
Under the terms of the stock purchase agreement, we acquired all of the outstanding stock of
After Hours from Federated Department Stores, Inc. in exchange for an aggregate purchase price of
$100.0 million, adjusted for certain items, primarily customer cash deposits retained by Federated
on rentals to be completed after closing. The total net cash consideration paid after these
adjustments and other acquisition costs was approximately $69.9 million.
Our primary sources of working capital are cash flow from operations and borrowings under the
Credit Agreement. We had working capital of $437.6 million at November 3, 2007, which is down from
$454.7 million at February 3, 2007 and $572.6 million at October 28, 2006. Historically, our
working capital has been at its lowest level in January and February, and has increased through
November as inventory buildup occurs in preparation for the fourth quarter selling season. The
$17.1 million decrease in working capital at November 3, 2007 compared to February 3, 2007 resulted
primarily from the acquisition of After Hours and the purchase of treasury stock.
23
Our operating activities provided net cash of $50.8 million and $143.1 million during the
first nine months of 2006 and 2007, respectively, due mainly to net earnings, adjusted for non-cash
charges, offset by increases in inventories and tuxedo rental product and a decrease in payables
and accrued expenses. Inventories increased in the first nine months of 2006 and 2007 due mainly
to seasonal inventory buildup and an increase in selling square footage. The increase in tuxedo
rental product in the first nine months of 2006 and 2007 is due to purchases of this product to
support the continued growth in our tuxedo rental business. Accounts payable and accrued expenses
decreased in the first nine months of 2006 and 2007 due mainly to the timing of vendor payments,
the payment of bonuses and the contribution to the employee stock ownership plan.
Our investing activities used net cash of $166.0 million for the first nine months of 2006 due
mainly to capital expenditures of $47.5 million and net purchases of short-term investments of
$117.5 million. During the first nine months of 2007, our investing activities used net cash of
$158.7 million due mainly to our acquisition of After Hours on April 9, 2007 for $69.9 million and
capital expenditures of $90.4 million. Short-term investments consist of auction rate securities
which represent funds available for current operations. These securities have stated maturities
beyond three months but are priced and traded as short-term instruments due to the liquidity
provided through the interest rate mechanism of 7 to 35 days. As of November 3, 2007, we held no
short-term investments. Our capital expenditures relate to costs incurred for stores opened,
remodeled or relocated during the period or under construction at the end of the period, office and
distribution facility additions and infrastructure technology investments.
Our financing activities used net cash of $10.8 million and $79.7 million for the first nine
months of 2006 and 2007, respectively, due mainly to purchases of treasury stock and the payment of
cash dividends, partially offset by proceeds from the issuance of common stock and excess tax
benefits in connection with stock based compensation.
In January 2006, the Board of Directors authorized a $100.0 million share repurchase program
of our common stock. This authorization superceded any remaining previous authorizations. As of
October 28, 2006, a total of 369,400 shares at a cost of $11.5 million were purchased in open
market transactions under this program at an average price per share of $31.16. In August 2007,
the Company’s Board of Directors approved a replenishment of the Company’s share repurchase program
to $100 million by authorizing $90.3 million to be added to the remaining $9.7 million of the then
current program. During the first nine months of 2007, 1,063,200 shares at a cost of $50.1 million
were purchased in open market transactions under the January 2006 authorization at an average price
of $47.08 and 694,800 shares at a cost of $28.0 million were purchased in open market transactions
under the August 2007 authorization at an average price of $40.34. For the nine months ended
November 3, 2007 a total of 1,758,000 shares were purchased at a cost of $78.1 million at an
average price of $44.41. At November 3, 2007, the remaining balance available under the August
2007 replenishment was $72.0 million.
We anticipate that our existing cash and cash flow from operations, supplemented by borrowings
under our Credit Agreement, will be sufficient to fund the planned store openings, other capital
expenditures and operating cash requirements for at least the next 12 months.
As substantially all of our cash is held by three financial institutions, we are exposed to
risk of loss in the event of failure of any of these parties. However, due to the creditworthiness
of these financial institutions, we anticipate full performance and access to our deposits and
liquid investments.
In connection with our direct sourcing program, we may enter into purchase commitments that
are denominated in a foreign currency (primarily the Euro). We generally enter into forward
exchange contracts to reduce the risk of currency fluctuations related to such commitments. We may
also be exposed to market risk as a result of changes in foreign exchange rates. This market risk
should be substantially offset by changes in the valuation of the underlying transactions. As of
November 3, 2007, we had no contracts outstanding.
24
ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to exposure from fluctuations in U.S. dollar/Euro exchange rates and the
Canadian dollar/Euro exchange rates. As further described in Note 5 of Notes to Condensed
Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition
and Results of Operations — Liquidity and Capital Resources”, we utilize foreign currency forward
exchange contracts to limit exposure to changes in currency exchange rates. At October 28, 2006
and November 3, 2007, we had no contracts outstanding.
Moores conducts its business in Canadian dollars. The exchange rate between Canadian dollars
and U.S. dollars has fluctuated over the last ten years. If the value of the Canadian dollar
against the U.S. dollar weakens, then the revenues and
earnings of our Canadian operations will be reduced when they are translated to U.S. dollars.
Also, the value of our Canadian net assets in U.S. dollars may decline.
We are also subject to market risk from our Canadian term loan of US$92.6 million at November
3, 2007, which bears interest at CDO rate plus an applicable margin (see Note 8 of Notes to
Condensed Consolidated Financial Statements). An increase in market interest rates would increase
our interest expense and our cash requirements for interest payments. For example, an average
increase of 0.5% in the variable interest rate would increase our interest expense and payments by
approximately $0.5 million.
ITEM 4 — CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s chief executive officer and
chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange
Act of 1934, as amended) as of the end of the fiscal quarter ended November 3, 2007. Based on this
evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures
were effective as of the end of the fiscal quarter ended November 3, 2007 to ensure that
information that is required to be disclosed by the Company in the reports it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms.
Changes in Internal Controls over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred
during the fiscal quarter ended November 3, 2007 that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial reporting.
25
PART II. OTHER INFORMATION
ITEM 1 — LEGAL PROCEEDINGS
We are involved in various routine legal proceedings, including ongoing litigation, incidental
to the conduct of our business. Management believes that none of these matters will have a
material adverse effect on our financial position, results of operations or cash flows.
ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) The following table presents information with respect to purchases of common stock of
the Company made during the quarter ended November 3, 2007 as defined by Rule 10b-18(a)(3) under
the Exchange Act:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
(c) |
|
|
| |
|
|
|
|
|
|
|
|
|
Total |
|
(d) |
| |
|
|
|
|
|
|
|
|
|
Number of |
|
Approximate |
| |
|
|
|
|
|
|
|
|
|
Shares |
|
Dollar Value of |
| |
|
|
|
|
|
|
|
|
|
Purchased |
|
Shares that |
| |
|
|
|
|
|
|
|
|
|
as Part of |
|
May Yet Be |
| |
|
(a) |
|
(b) |
|
Publicly |
|
Purchased |
| |
|
Total Number |
|
Average |
|
Announced |
|
Under the |
| |
|
of Shares |
|
Price Paid |
|
Plans or |
|
Plans or |
| Period |
|
Purchased |
|
Per Share |
|
Programs |
|
Programs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
| |
August 5, 2007 through September 1, 2007 |
|
|
123,200 |
|
|
$ |
49.43 |
|
|
|
123,200 |
|
|
$ |
100,000 |
|
| |
September 2, 2007 through October 6, 2007 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
100,000 |
|
| |
October 7, 2007 through November 3, 2007 |
|
|
694,800 |
|
|
$ |
40.34 |
|
|
|
694,800 |
|
|
$ |
71,975 |
|
| |
Total |
|
|
818,000 |
|
|
$ |
41.71 |
|
|
|
818,000 |
|
|
$ |
71,975 |
|
| |
In August 2007, the Company’s Board of Directors approved a replenishment of the Company’s
share repurchase program to $100.0 million. Stock purchases that occurred in August applied to the
January 2006 Authorization.
26
ITEM 6 — EXHIBITS
(a) Exhibits.
| |
|
|
|
|
| Exhibit |
|
|
|
|
| Number |
|
|
|
Exhibit Index |
|
|
|
|
|
3.1
|
|
—
|
|
Second Amended and Restated Bylaws (incorporated by
reference from Exhibit 3.1 to the Company’s Current
Report on Form 8-K filed with the Commission on December
6, 2007). |
|
|
|
|
|
31.1
|
|
—
|
|
Certification of Periodic Report Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 by the Chief Executive
Officer (filed herewith). |
|
|
|
|
|
31.2
|
|
—
|
|
Certification of Periodic Report Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 by the Chief Financial
Officer (filed herewith). |
|
|
|
|
|
32.1
|
|
—
|
|
Certification of Periodic Report Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 by the Chief Executive
Officer (filed herewith). |
|
|
|
|
|
32.2
|
|
—
|
|
Certification of Periodic Report Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 by the Chief Financial
Officer (filed herewith). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant, The Men’s
Wearhouse, Inc., has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
| |
|
|
|
|
| Dated: December 13, 2007 |
THE MEN’S WEARHOUSE, INC.
|
|
| |
By |
/s/ NEILL P. DAVIS
|
|
| |
|
Neill P. Davis |
|
| |
|
Executive Vice President, Chief Financial Officer,
Treasurer and Principal Financial Officer |
|
27
EXHIBIT INDEX
| |
|
|
|
|
| Exhibit |
|
|
|
|
| Number |
|
|
|
Exhibit Index |
|
|
|
|
|
3.1
|
|
—
|
|
Second Amended and Restated Bylaws (incorporated by
reference from Exhibit 3.1 to the Company’s Current
Report on Form 8-K filed with the Commission on December
6, 2007). |
|
|
|
|
|
31.1
|
|
—
|
|
Certification of Periodic Report Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 by the Chief Executive
Officer (filed herewith). |
|
|
|
|
|
31.2
|
|
—
|
|
Certification of Periodic Report Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 by the Chief Financial
Officer (filed herewith). |
|
|
|
|
|
32.1
|
|
—
|
|
Certification of Periodic Report Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 by the Chief Executive
Officer (filed herewith). |
|
|
|
|
|
32.2
|
|
—
|
|
Certification of Periodic Report Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 by the Chief Financial
Officer (filed herewith). |
28