UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

 

 

Commission file number 1-16097

THE MEN’S WEARHOUSE, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

(281) 776-7200
(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ.     No o.

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o.     No þ.

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

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 aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing price of shares of common stock on the New York Stock Exchange on August 4, 2007, was approximately $2,302.0 million.

 

The number of shares of common stock of the registrant outstanding on March 28, 2008 was 51,414,132 excluding 18,154,660 shares classified as Treasury Stock.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

 

 

FORM 10-K REPORT INDEX

 

Forward-Looking and Cautionary Statements

 

Certain statements made in this Annual Report on Form 10-K 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 Annual Report on Form 10-K 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” contained in Part I of this Annual Report on Form 10-K 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.

 

 

General

 

The Men’s Wearhouse began operations in 1973 as a partnership and was incorporated as The Men’s Wearhouse, Inc. (the “Company”) under the laws of Texas in May 1974. Our principal corporate and executive offices are located at 6380 Rogerdale Road, Houston, Texas 77072-1624 (telephone number 281/776-7200) and at 40650 Encyclopedia Circle, Fremont, California 94538-2453 (telephone number 510/657-9821), respectively. Unless the context otherwise requires, “Company”, “we”, “us” and “our” refer to The Men’s Wearhouse, Inc. and its subsidiaries.

 

Our website address is www.tmw.com. Through the investor relations section of our website, we provide free access to our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). The public may read and copy any materials we file with or furnish to the SEC at the SEC’s Public Reference Room at 100 F Street NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website that contains the Company’s filings and other information regarding issuers who file electronically with the SEC at www.sec.gov.

 

The Company

 

We are one of the largest specialty retailers of men’s suits and the largest provider of tuxedo rental product in the United States and Canada. At February 2, 2008, we operated 784 retail apparel stores, with 668 stores in the United States and 116 stores in Canada, and 489 tuxedo rental stores. Our U.S. retail apparel stores are operated under the brand names of Men’s Wearhouse (563 stores) and K&G (105 stores) in 46 states and the District of Columbia. Our Canadian stores are operated under the brand name of Moores Clothing for Men in ten provinces. Our tuxedo rental stores, which offer a full selection of tuxedo rental product as well as a limited selection of retail merchandise (primarily formalwear), are operated under the brand name of MW Tux in 35 states.

 

On April 9, 2007, we acquired all of the outstanding stock of After Hours Formalwear, Inc. (“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 $69.8 million. At the time of the acquisition, After Hours had 509 tuxedo rental product stores operating under After Hours Formalwear and Mr. Tux store fronts in the United States. We closed a net 20 stores and, during the fourth quarter of 2007, substantially completed the integration of the acquired operations, including a rebranding of the acquired stores to MW Tux. The Company also entered into a marketing agreement with David’s Bridal, Inc., the nation’s largest bridal retailer, in connection with the acquisition. The marketing agreement continued a preferred relationship between David’s Bridal, Inc. and After Hours and extended the preferred relationship to include the tuxedo rental operations of the Men’s Wearhouse stores.

 

Below is a brief description of our brands:

 

Men’s Wearhouse/MW Tux

 

Under the Men’s Wearhouse brand, we target middle and upper-middle income men by offering quality merchandise at everyday low prices. In addition to value, we believe we provide a superior level of customer service. Men’s Wearhouse apparel stores offer a broad selection of designer, brand name and private label merchandise at prices we believe are typically 20% to 30% below the regular prices found at traditional department and specialty stores. Our merchandise includes suits, sport coats, slacks, formalwear, business casual, sportswear, outerwear, dress shirts, shoes and accessories. We concentrate on men’s “wear-to-work” business attire that is characterized by infrequent and more predictable fashion changes. Therefore, we believe we are not as exposed to

trends typical of more fashion-forward apparel retailers, where significant markdowns and promotional pricing are more common.

 

At February 2, 2008, we operated 563 Men’s Wearhouse apparel stores in 46 states and the District of Columbia. These stores are referred to as “Men’s Wearhouse stores” or “traditional stores” and are mainly located in middle and upper-middle income regional strip and specialty retail shopping centers. These stores, in substantially all locations, also offer a full selection of tuxedo rental product in a section of the store branded as MW Tux. We also operated another 489 stores in 35 states branded as MW Tux that offer a full selection of tuxedo rental product and a limited selection of retail merchandise, primarily formalwear. The MW Tux stores are smaller than our traditional stores and are located primarily in regional malls and lifestyle centers. We believe our tuxedo rental program broadens our customer base by drawing first-time and younger customers into our stores. We believe this in turn generates opportunities for incremental apparel sales by introducing these customers to the quality merchandise selection and superior level of customer service at our traditional stores.

 

K&G

 

Under the K&G brand, we target the more price sensitive customer. At February 2, 2008, we operated 105 K&G stores in 28 states. Eighty-nine of the K&G stores offer ladies’ career apparel that is also targeted to the more price sensitive customer.

 

We believe that K&G’s more value-oriented superstore approach appeals to certain customers in the apparel market. K&G offers first-quality, current-season apparel and accessories comparable in quality to that of traditional department and specialty stores, at everyday low prices we believe are typically 30% to 50% below the regular prices charged by such stores. K&G’s merchandising strategy emphasizes broad assortments across all major categories, including tailored clothing, casual sportswear, dress furnishings, footwear and accessories. This merchandise selection, which includes brand name as well as private label merchandise, positions K&G to attract a wide range of customers in each of its markets.

 

Moores

 

Under the Moores brand, we target middle and upper-middle income men in Canada by offering quality merchandise at everyday low prices. Moores is one of Canada’s leading specialty retailers of men’s suits, with 116 retail apparel stores in 10 Canadian provinces at February 2, 2008. Similar to the Men’s Wearhouse stores, Moores stores offer a broad selection of quality merchandise at prices we believe are typically 20% to 30% below the regular prices charged by traditional Canadian department and specialty stores. Moores focuses on conservative, basic tailored apparel that we believe limits exposure to changes in fashion trends and the need for significant markdowns. Moores’ merchandise consists of suits, sport coats, slacks, business casual, dress shirts, sportswear, outerwear, shoes and accessories. We also offer tuxedo rentals at all of our Moores stores.

 

Moores manufactures a portion of the tailored clothing for sale in its stores and in the Men’s Wearhouse stores through the manufacturing operations of the Company’s wholly owned subsidiary, Golden Brand Clothing (Canada) Ltd. (“Golden Brand”). Golden Brand’s manufacturing facility is located in Montreal, Quebec, and includes a cutting room, fusing department, pant shop and coat shop. On March 3, 2008, we announced our decision to close the manufacturing facility. Despite previous reductions in production over the last three years, the strengthening Canadian dollar and the increasing pace of imports by our competitors have caused us to reach the decision to close the manufacturing facility and to use other alternate production sources. We expect the closure to occur in or around July 2008.

 

We expect the total pre-tax charge to be incurred in connection with the closure of the Montreal manufacturing facility to be approximately $8.5 million, which consists primarily of severance payments, the write-off of fixed assets, lease termination payments and costs to finalize the clean-up and closing of the facility. We also estimate that approximately $7.3 million of the charge will result in future cash expenditures.

Expansion Strategy

 

Our expansion strategy includes:

 

 

In general terms, we consider a geographic area served by a common group of television stations as a single market.

 

At present, in 2008 we plan to open approximately 20 new Men’s Wearhouse stores, 22 new MW Tux stores, three new K&G stores and one new Moores store. We plan to close one K&G store and eight MW Tux stores and to expand and/or relocate approximately 16 existing Men’s Wearhouse stores, 26 existing MW Tux stores, one existing K&G store and two existing Moores stores and to continue expansion in subsequent years. We believe that our ability to increase the number of traditional Men’s Wearhouse stores in the United States above 600 will be limited. However, we believe that additional growth opportunities exist through improving and diversifying our merchandise mix, relocating existing stores, expanding our MW Tux brand and adding complementary products and services.

 

We also plan to continue to pursue our corporate apparel and uniform program in 2008 by entering into contracts to provide corporate uniforms to new customers’ workforces. As of February 2, 2008, we are servicing approximately ten contract customers.

 

As of February 2, 2008, we are operating 36 retail dry cleaning and laundry facilities in the Houston, Texas area. We plan to open five additional retail dry cleaning and laundry facilities in the same area during 2008.

 

Merchandising

 

Our apparel stores offer a broad selection of designer, brand name and private label men’s business attire, including a consistent stock of core items (such as basic suits, navy blazers and tuxedos). Although basic styles are emphasized, each season’s merchandise reflects current fabric and color trends, and a small percentage of inventory, accessories in particular, are usually more fashion oriented. The broad merchandise selection creates increased sales opportunities by permitting a customer to purchase substantially all of his tailored wardrobe and accessory requirements, including shoes, at our apparel stores. Within our tailored clothing, we offer an assortment of styles from a variety of manufacturers and maintain a broad selection of fabrics, colors and sizes. Based on the experience and expertise of our management, we believe that the depth of selection offered provides us with an advantage over most of our competitors.

 

The Company’s inventory mix includes “business casual” merchandise designed to meet demand for such products resulting from more relaxed dress codes in the workplace. This merchandise consists of tailored and non-tailored clothing (sport coats, casual slacks, knits and woven sports shirts, sweaters and casual shoes) that complements the existing product mix and provides opportunity for enhanced sales without significant inventory risk.

 

We do not purchase significant quantities of merchandise overruns or close-outs. We provide recognizable quality merchandise at consistent prices that assist the customer in identifying the value available at our apparel stores. We believe that the merchandise at Men’s Wearhouse and Moores stores is generally offered 20% to 30% below traditional department and specialty store regular prices and that merchandise at K&G stores is generally 30% to 50% below regular retail prices charged by such stores. A ticket is generally affixed to items, which displays our selling price alongside a price we believe reflects the regular, non-promotional price of the item at traditional department and specialty stores.

 

By targeting men’s business attire, a category of men’s clothing characterized by infrequent and more predictable fashion changes, we believe we are not as exposed to trends typical of more fashion-forward apparel

retailers. This allows us to carry basic merchandise over to the following season and reduces the need for markdowns; for example, a navy blazer or gray business suit may be carried over to the next season. Our Men’s Wearhouse and Moores stores have an annual sale that starts around Christmas and runs through the month of January, during which prices on many items are reduced 20% to 50% off the everyday low prices. This sale reduces stock at year-end and prepares for the arrival of the new season’s merchandise. We also have a similar event in mid-summer; however, the level of advertising for promotion of the summer event is lower than that for the year-end event.

 

During 2005, 2006 and 2007, 55.6%, 54.9% and 54.1%, respectively, of our total men’s net clothing product sales were attributable to tailored clothing (suits, sport coats and slacks) and 44.4%, 45.1% and 45.9%, respectively, were attributable to casual attire, sportswear, shoes, shirts, ties, outerwear and other clothing product revenues.

 

In addition to accepting cash, checks, nationally recognized credit cards and gift cards, we offer our own private label credit card to Men’s Wearhouse customers. A third-party vendor provides all necessary servicing and processing and assumes all credit risks associated with the private label credit card program. All purchases made with the private label credit card at Men’s Wearhouse stores receive a 5% discount at the time of purchase. During 2007, private label credit card sales represented approximately 5% of sales at Men’s Wearhouse stores.

 

We also offer our “Perfect Fit” loyalty program to our Men’s Wearhouse, MW Tux and Moores customers. Under the loyalty program, customers receive points for purchases. Points are equivalent to dollars spent on a one-for-one basis, excluding any sales tax dollars. Upon reaching 500 points, customers are issued a $50 rewards certificate which they may use to make purchases at Men’s Wearhouse, MW Tux or Moores stores. We believe that the loyalty program facilitates our ability to cultivate long-term relationships with our customers. All customers who register for our “Perfect Fit” loyalty program are eligible to participate and earn points for purchases.

 

Customer Service and Marketing

 

The Men’s Wearhouse and Moores sales personnel are trained as clothing consultants to provide customers with assistance and advice on their apparel needs, including product style, color coordination, fabric choice and garment fit. For example, many clothing consultants at Men’s Wearhouse stores attend an intensive training program at our training facility in Fremont, California, which is further supplemented with store meetings, in-market training programs and frequent interaction with all levels of store management.

 

We encourage our clothing consultants to be friendly and knowledgeable and to promptly greet each customer entering the store. Consultants are encouraged to offer guidance to the customer at each stage of the decision-making process, making every effort to earn the customer’s confidence and to create a professional relationship that will continue beyond the initial visit. Clothing consultants are also encouraged to contact customers after the purchase or pick-up of tailored clothing to determine whether customers are satisfied with their purchases and, if necessary, to take corrective action. Store personnel as well as Men’s Wearhouse customer services representatives operating from our corporate offices have full authority to respond to customer complaints and reasonable requests, including the approval of returns, exchanges, refunds, re-alterations and other special requests, all of which we believe helps promote customer satisfaction and loyalty.

 

K&G stores are designed to allow customers to select and purchase apparel by themselves. For example, each merchandise category is clearly marked and organized by size, and suits are specifically tagged “Athletic Fit,” “Double-Breasted,” “Three Button,” etc., as a means of further assisting customers to easily select their styles and sizes. K&G employees are also available to assist customers with merchandise selection, including correct sizing.

 

Each of our apparel stores provides on-site tailoring services to facilitate timely alterations at a reasonable cost to customers. Tailored clothing purchased at a Men’s Wearhouse store will be pressed and re-altered (if the alterations were performed at a Men’s Wearhouse store) free of charge for the life of the garment.

 

Because management believes that men prefer direct and easy store access, we attempt to locate our apparel stores in regional strip and specialty retail centers or in freestanding buildings to enable customers to park near the entrance of the store.

MW Tux stores are generally smaller than our apparel stores and offer a full selection of tuxedo rental product as well as a limited assortment of retail merchandise, primarily formalwear. These stores are staffed to facilitate the tuxedo rental process and are primarily located in regional malls and lifestyle centers.

 

The Company also entered into a marketing agreement with David’s Bridal, Inc., the nation’s largest bridal retailer, in connection with the After Hours acquisition. The marketing agreement continued a preferred relationship between David’s Bridal, Inc. and After Hours and extended the preferred relationship to include the tuxedo operations of Men’s Wearhouse stores.

 

Our total annual advertising expenditures, which were $61.5 million, $67.3 million and $73.8 million in 2005, 2006 and 2007, respectively, are significant. The Company’s advertising strategy primarily consists of television, radio, direct mail, email, online and bridal shows. We consider our integrated efforts across these channels to be the most effective means of both attracting and reaching potential new customers, as well as reinforcing our positive attributes for our various brands with our existing customer base.

 

Purchasing and Distribution

 

We purchase merchandise and tuxedo rental product from approximately 800 vendors. In 2007, no vendor accounted for 10% or more of purchases. Management does not believe that the loss of any vendor would significantly impact us. While we have no material long-term contracts with our vendors, we believe that we have developed an excellent relationship with our vendors, which is supported by consistent purchasing practices.

 

We believe we obtain favorable buying opportunities relative to many of our competitors. We do not request cooperative advertising support from manufacturers, which reduces the manufacturers’ costs of doing business with us and enables them to offer us lower prices. Further, we believe we obtain better discounts by entering into purchase arrangements that provide for limited return policies, although we always retain the right to return goods that are damaged upon receipt or determined to be improperly manufactured. Finally, volume purchasing of specifically planned quantities well in advance of the season enables more efficient production runs by manufacturers who, in turn, generally pass some of the cost savings back to us.

 

Direct Sourcing

 

We purchased approximately 38% and 60% of total U.S. and Canada clothing product purchases, respectively, in 2007 through a direct sourcing program. We have no long-term merchandise supply contracts and typically transact business on a purchase order-by-purchase order basis either directly with manufacturers and fabric mills or with trading companies. In 2007, we worked with 56 manufacturers and fabric mills that supplied 80% of our direct sourced merchandise. We have developed long-term and reliable relationships with over half of our direct manufacturers and fabric mills, which we believe provides stability, quality and price leverage. In 2007, we also worked with 15 trading companies that supported our relationships with vendors for approximately 20% of our direct sourced merchandise.

 

These 71 vendors that comprise our direct sourcing base operate 85 factories in 15 countries, with 70% of our direct sourced merchandise supplied by our top 10 vendors. Each of our top 10 direct sourcing vendors uses a limited number of factories to produce its merchandise, which we believe gives us a high degree of consistency and price leverage in placing production of our merchandise. We believe we have developed strong relationships with our vendors, most of which rely upon us for a significant portion of their business.

 

We have two exclusive contract agent offices that provide administrative functions for our manufacturing system as well as communication functions on our behalf to the vendors. In addition, the agent offices provide all quality control inspections and ensure that our operating procedures manuals are adhered to by our suppliers.

 

During 2007, 75% of our direct sourced merchandise was sourced in Asia (65% from China, Indonesia and India) while 20% was sourced in Canada, Mexico and Chile and 5% was sourced in Europe and other regions. All of our foreign purchases are negotiated and paid for in U.S. dollars, except purchases from Italy which are negotiated and paid for in Euros.

Approximately 98% of our direct sourced merchandise from abroad is shipped in containers via ocean vessel and generally takes approximately 20 to 25 days in transit. The remainder of our merchandise from abroad is shipped via air, which takes on average approximately 5 to 7 days in transit. The containers are shipped directly to U.S. and Canadian ports and are then transported by a combination of rail and truck to our distribution center in Houston for U.S. merchandise or Montreal for Canadian merchandise.

 

All direct source vendors are expected to adhere to our compliance program. The compliance program consists of two parts: Men’s Wearhouse Standards and Business Practices Guidelines and US Customs and Border Protection’s C-TPAT program. The general principles of our Standards and Business Practices Guidelines as it relates to international sourcing and vendor compliance include a commitment to legal compliance and ethical business practices in all of our operations and utilization of suppliers that we believe operate in compliance with applicable laws, rules and regulations, including those related to labor, worker health and safety and the environment. Suppliers must inform workers about these workplace standards through education and posting of the standards in a prominent place. We also recognize the need to protect our international movement of goods from potential acts of terrorism. The C-TPAT program with security guidelines for each segment of the international supply chain protects our goods through the international supply chain as well as the welfare of U.S. citizens. To oversee compliance, we have a direct sourcing compliance department with a staff of four employees. In addition, we use the services of an outside audit company to conduct frequent unannounced and announced vendor audits.

 

We expect that purchases through the direct sourcing program will represent approximately 36% and 55% of total U.S. and Canada purchases, respectively, in 2008. We believe that our direct sourcing of product, with both owned and third party labels, has been and will continue to be a significant factor in our ability to improve our gross clothing product margins.

 

Distribution

 

All retail apparel merchandise for Men’s Wearhouse stores is received into our central warehouse located in Houston, Texas. Merchandise for a store is picked and then moved to the appropriate staging area for shipping. In addition to the central distribution center in Houston, we have separate hub warehouse facilities or space within certain Men’s Wearhouse stores in the majority of our markets, which function as redistribution facilities for their respective areas. Approximately 71% of purchased merchandise is transported to our K&G stores from our central distribution center in Houston. All other merchandise is direct shipped by vendors to the stores. We anticipate that we will continue to transport merchandise to our K&G stores using a combination of our central distribution center and direct shipment from vendors. Most purchased merchandise for our Moores stores is distributed to the stores from our warehouse in Montreal.

 

Our tuxedo rental product is located in our central warehouse located in Houston, Texas and in 11 additional distribution facilities located in the US (10) and Canada (1). The 11 additional distribution facilities also receive limited quantities of rental related product, primarily formalwear accessories, that is sold in our Men’s Wearhouse and MW Tux stores.

 

A majority of all merchandise and tuxedo rental product is transported from vendors to our distribution facilities and from the distribution facilities to our hub warehouse facilities or stores by common carriers. We lease or own 239 smaller van-like trucks which are used to deliver merchandise, tuxedo rental product, laundry and dry cleaning locally or within a given geographic region to our stores and our laundry/dry cleaning customers.

 

Competition

 

Our primary competitors include specialty men’s clothing stores, traditional department stores, off-price retailers, manufacturer-owned and independently owned outlet stores and their E-commerce channels and independently owned tuxedo rental stores. We believe that the principal competitive factors in the menswear market are merchandise assortment, quality, price, garment fit, merchandise presentation, store location and customer service.

 

We believe that strong vendor relationships, our direct sourcing program and our buying volumes and patterns are the principal factors enabling us to obtain quality merchandise at attractive prices. We believe that our vendors rely on our predictable payment record and history of honoring promises, including our promise not to advertise

names of labeled and unlabeled designer merchandise when requested. Certain of our competitors (principally department stores) may be larger and may have substantially greater financial, marketing and other resources than we have and therefore may have certain competitive advantages.

 

Seasonality

 

Our business is subject to seasonal fluctuations. In most years, a significant portion of our net sales and our net earnings have been generated during the fourth quarter of each year when holiday season shopping peaks. 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. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full year (see Note 12 of Notes to Consolidated Financial Statements).

 

Trademarks and Servicemarks

 

We are the owner in the United States and selected other countries of the trademark and service mark “The Men’s Wearhouse^®,” and “MW Men’s Wearhouse (and design)^®” and “Men’s Wearhouse^®” and of federal registrations therefor expiring in 2009, 2010, 2011, 2012 and 2017 respectively, subject to renewal. Our rights in the “The Men’s Wearhouse^®,” “MW Men’s Wearhouse (and design)^®,” and “Men’s Wearhouse^®” marks are a significant part of our business, as the marks have become well known through our use of the marks in connection with our services, products, and television and radio advertising campaigns. Accordingly, we intend to maintain our marks and the related registrations. In addition, we own or license the above marks and other marks used in the business, principally in connection with the labeling of products purchased through the direct sourcing program.

 

We have entered into license agreements with a limited number of parties under which we are entitled to use designer labels such as “Gary Player^®” and nationally recognized brand labels such as “Botany^®” and “Botany 500^®” in return for royalties paid to the licensor based on the costs of the relevant product. These license agreements generally limit the use of the individual label to products of a specific nature (such as men’s suits, men’s formalwear or men’s shirts). The labels licensed under these agreements will continue to be used in connection with a portion of the purchases under the direct sourcing program described above, as well as purchases from other vendors. We monitor the performance of these licensed labels compared to their cost and may elect to selectively terminate any license, as provided in the respective agreement. We have also purchased several trademarks, including “Cricketeer^®,” “Joseph & Feiss^®,” “Baracuta^®,” “Pronto Uomo^®,” “Linea Uomo^®,” and “Twinhill^®,” which are used similarly to our licensed labels. We may be presented with opportunities to acquire or license other designer or nationally recognized brand labels.

 

MW Tux operates under the service mark “MW TUX,” and we are the owner of the mark as well as certain logos incorporating MW Tux or the letters MW to identify the retail and rental services. The application for those marks is currently pending. We are further owners of and use certain marks stemming from the After Hours acquisition, including “AFTER HOURS^®,” “GINGISS^®,” “Mr. Tux,” and “MODERN TUXEDO.”

 

We are also the owner in the United States of the service marks “MW CUSTOM^®,” as well a logo incorporating MW CUSTOM^® to identify manufacturing clothing to the order and/or specification of others and federal registrations therefor expiring in 2017, subject to renewal.

 

K&G stores operate under the marks “K&G^®,” “K&G Fashion SuperStore^®,” “K&G Superstore^®,” “K&G Men’s Superstore^®,” “K&G Men’s Center,” “K&G Mensmart” and “K&G Suit Warehouse.” We are the owners of federal registrations for “K&G^®”, “K&G Fashion SuperStore^®” and “K&G Men’s Superstore^®”. In addition, we own or license other marks used in the business, principally in connection with the labeling of products purchased through the direct sourcing program.

 

We are also the owner in the United States of the service mark “MWCLEANERS^®” as well as certain logos incorporating “MWCLEANERS” or the letters “MW” to identify dry cleaning and alteration services. We are also the owner of “MW & Design (bow tie)^®” and federal registration therefor expiring in 2016, subject to renewal.

We own, in the United States, TWINHILL (No. 2165445) and federal registration therefor expiring in 2008, subject to renewal.

 

We own Canadian trademark registrations for the marks “Moores The Suit People^®,” “Moores Vetements Pour Hommes^®,” “Moores Vetements Pour Hommes (and design) ^®,” “Moores Clothing For Men” and “Moores Clothing For Men (and design)^®.” Moores stores operate under the tradenames “Moores Clothing For Men” and “Moores Vetements Pour Hommes.”

 

Employees

 

At February 2, 2008, we had approximately 18,400 employees, of whom approximately 12,900 were full-time and approximately 5,500 were part-time employees. Seasonality affects the number of part-time employees as well as the number of hours worked by full-time and part-time personnel.

 

Approximately 500 of our employees at our Golden Brand manufacturing facility belong to the Union of Needletrades, Industrial and Textile Employees. Golden Brand is part of a collective bargaining unit. The current union contract expires in November 2009. On March 3, 2008, we announced our decision to close the manufacturing facility. Despite previous reductions in production over the last three years, the strengthening Canadian dollar and the increasing pace of imports by our competitors have caused us to reach the decision to close the manufacturing facility and to use other alternate production sources. We expect the closure to occur in or around July 2008. We expect the total pre-tax charge to be incurred in connection with the closure of the Montreal manufacturing facility to be approximately $8.5 million, which consists primarily of severance payments, the write-off of fixed assets, lease termination payments and costs to finalize the clean-up and closing of the facility.

 

 

We wish to caution you that there are risks and uncertainties that could affect our business. These risks and uncertainties include, but are not limited to, the risks described below and elsewhere in this report, particularly found in “Forward-Looking and Cautionary Statements.” The following is not intended to be a complete discussion of all potential risks or uncertainties, as it is not possible to predict or identify all risk factors.

 

Our business is particularly sensitive to economic conditions and consumer confidence.

 

Consumer confidence is often adversely impacted by many factors including local, regional or national economic conditions, continued threats of terrorism, acts of war and other uncertainties. We believe that a decrease in consumer spending in response to recessionary conditions and/or a decline in consumer confidence will affect us more than other retailers because a slowing of men’s discretionary spending for items like tailored apparel tends to occur faster than that for other retail purchases.

 

Our ability to continue to expand our Men’s Wearhouse stores may be limited.

 

A large part of our growth has resulted from the addition of new Men’s Wearhouse stores and the increased sales volume and profitability provided by these stores. We will continue to depend on adding new stores to increase our sales volume and profitability. As of February 2, 2008, we operate 563 Men’s Wearhouse stores. However, we believe that our ability to increase the number of Men’s Wearhouse stores in the United States above 600 will be limited. Therefore, we cannot assure you that we will continue to experience the same rate of growth as we have historically.

 

Certain of our expansion strategies may present greater risks.

 

We are continuously assessing opportunities to expand complementary products and services related to our traditional business, such as corporate apparel sales and retail dry cleaning establishments. We may expend both capital and personnel resources on such business opportunities which may or may not be successful.

Any acquisitions that we undertake could be difficult to integrate, disrupt our business, dilute stockholder value and harm our operating results.

 

In the event we complete one or more acquisitions, we may be subject to a variety of risks, including risks associated with an ability to integrate acquired assets or operations into our existing operations, higher costs or unexpected difficulties or problems with acquired assets or entities, outdated or incompatible technologies, labor difficulties or an inability to realize anticipated synergies and efficiencies, whether within anticipated timeframes or at all. If one or more of these risks are realized, it could have an adverse impact on our operations.

 

Our business is seasonal.

 

In most years, a significant portion of our net sales and our net earnings have been generated during November, December and January. 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. Accordingly, our results for any quarter are not necessarily indicative of our annual profitability and any decrease in sales during these peak quarters could have a significant adverse effect on our net earnings.

 

Sales in the men’s tailored clothing market have changed modestly over recent years.

 

According to industry sources, sales in the men’s tailored clothing market increased modestly in 2005, declined slightly in 2006 and increased modestly again in 2007. We believe that these modest changes are an indication that demand for men’s tailored clothing may be weakening. As a result, we may not be able to continue to expand our sales volume within our segment of the retailing industry.

 

The loss of, or disruption in, our centralized distribution center could result in delays in the delivery of merchandise to our stores.

 

All retail apparel merchandise for Men’s Wearhouse stores and a majority of the merchandise for K&G stores is received into our centralized distribution center in Houston, Texas, where the inventory is then processed, sorted and shipped to our stores. We depend in large part on the orderly operation of this receiving and distribution process, which depends, in turn, on adherence to shipping schedules and effective management of the distribution center. Events, such as disruptions in operations due to fire or other catastrophic events, employee matters or shipping problems, may result in delays in the delivery of merchandise to our stores. For example, given our proximity to the Texas Gulf Coast, it is possible that a hurricane or tropical storm could cause damage to the distribution center, result in extended power outages, or flood roadways into and around the distribution center, any of which would disrupt or delay deliveries to the distribution center and to our stores.

 

Although we maintain business interruption and property insurance, we cannot assure you that our insurance will be sufficient, or that insurance proceeds will be timely paid to us, in the event our centralized distribution center is shut down for any reason or if we incur higher costs and longer lead times in connection with a disruption at our distribution center.

 

Union activity as a result of the announced closure of our Golden Brand manufacturing facility could impact the interim production at the facility and subject the Company to a negative union campaign.

 

On March 3, 2008, we announced our decision to close the Golden Brand manufacturing facility located in Montreal, Quebec in or around July 2008. Approximately 500 of our employees at Golden Brand belong to the Union of Needletrades, Industrial and Textile Employees (“UNITE”). As a result of the announced closure, UNITE has and may continue to engage in protests and other activities aimed at the Company. Such protests and other activities may result in slowdowns or disruptions in production at the manufacturing facility. In addition, such union activity may include attempts to dissuade customers from shopping at our stores.

Our stock price has been and may continue to be volatile due to many factors.

 

The market price of our common stock has fluctuated in the past and may change rapidly in the future depending on news announcements and changes in general market conditions. The following factors, among others, may cause significant fluctuations in our stock price:

 

 

Rights of our shareholders may be negatively affected if we issue any of the shares of preferred stock which our Board of Directors has authorized for issuance.

 

We have available for issuance 2,000,000 shares of preferred stock, par value $.01 per share. Our Board of Directors is authorized to issue any or all of this preferred stock, in one or more series, without any further action on the part of shareholders. The rights of our shareholders may be negatively affected if we issue a series of preferred stock in the future that has preference over our common stock with respect to the payment of dividends or distribution upon our liquidation, dissolution or winding up. See Note 7 of Notes to Consolidated Financial Statements for more information.

 

Our success significantly depends on our key personnel and our ability to attract and retain additional personnel.

 

Mr. George Zimmer has been very important to our success. Mr. Zimmer is the Company’s Chairman of the Board, Chief Executive Officer and primary advertising spokesman. The loss of Mr. Zimmer’s services could have a material adverse effect on the securities markets’ view of our prospects.

 

Also, our continued success and the achievement of our expansion goals are dependent upon our ability to attract and retain additional qualified employees as we expand.

 

Fluctuations in exchange rates may cause us to experience currency exchange losses.

 

Moores conducts most of its business in Canadian dollars. The exchange rate between Canadian dollars and U.S. dollars has fluctuated historically. 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 subject to import risks, including potential disruptions in supply, changes in duties, tariffs, quotas and voluntary export restrictions on imported merchandise, strikes and other events affecting delivery; and economic, political or other problems in countries from or through which merchandise is imported.

 

Many of the products sold in our stores are sourced from many foreign countries. Political or financial instability, terrorism, trade restrictions, tariffs, currency exchange rates, transport capacity limitations, disruptions and costs, strikes and other work stoppages and other factors relating to international trade are beyond our control and could affect the availability and the price of our inventory.

 

If we are unable to operate information systems and implement new technologies effectively, our business could be disrupted or our sales or profitability could be reduced.

 

The efficient operation of our business is dependent on our information systems, including our ability to operate them effectively and successfully to implement new technologies, systems, controls and adequate disaster

recovery systems. In addition, we must protect the confidentiality of our and our customers’ data. The failure of our information systems to perform as designed or our failure to implement and operate them effectively could disrupt our business or subject us to liability and thereby harm our profitability.

 

 

None.

 

As of February 2, 2008, we operated 1,157 retail apparel and tuxedo rental stores in 46 states and the District of Columbia and 116 retail apparel stores in the 10 Canadian provinces. The following tables set forth the location, by state or province, of these stores:

 

 

 

Men’s Wearhouse and Moores stores vary in size from approximately 3,100 to 15,100 total square feet (average square footage at February 2, 2008 was 5,703 square feet with 66% of stores having between 4,500 and 6,500 square feet). Men’s Wearhouse and Moores stores are primarily located in middle and upper-middle income regional strip and specialty retail shopping centers. We believe our customers generally prefer to limit the amount of time they spend shopping for menswear and seek easily accessible store sites.

 

Men’s Wearhouse and Moores stores are designed to further our strategy of facilitating sales while making the shopping experience pleasurable. We attempt to create a specialty store atmosphere through effective merchandise presentation and sizing, attractive in-store signs and efficient checkout procedures. Most of these stores have similar floor plans and merchandise presentation to facilitate the shopping experience and sales process. Designer, brand name and private label garments are intermixed, and emphasis is placed on the fit of the garment rather than on a particular label or manufacturer. Each store is staffed with clothing consultants and sales associates and has a tailoring facility with at least one tailor. Each store is also staffed with an operations manager or other tuxedo rental specialist to facilitate the tuxedo rental process and enhance the customer’s experience in our store.

 

MW Tux stores vary in size from approximately 500 to 5,172 total square feet (average square footage at February 2, 2008 was 1,333 square feet with 78% of stores having between 1,000 and 4,000 square feet). MW Tux stores are generally smaller than our traditional stores and offer a full selection of tuxedo rental product as well as a limited assortment of retail merchandise, primarily formalwear. These stores are staffed to facilitate the tuxedo rental process and are primarily located in regional malls and lifestyle centers.

 

K&G stores vary in size from approximately 5,400 to 42,000 total square feet (average square footage at February 2, 2008 was 23,132 square feet with 60% of stores having between 15,000 and 25,000 square feet). K&G stores are “destination” stores located primarily in second generation strip shopping centers that are easily accessible from major highways and thoroughfares. K&G has created a 20,000 to 25,000 square foot prototype men’s and ladies’ superstore with fitting rooms and convenient check-out, customer service and tailoring areas. K&G stores are organized to convey the impression of a dominant assortment of first-quality merchandise and to project a no-frills, value-oriented warehouse atmosphere. Each element of store layout and merchandise presentation is designed to reinforce K&G’s strategy of providing a large selection and assortment in each category. We seek to make K&G stores “customer friendly” by utilizing store signage and grouping merchandise by categories and sizes, with brand name and private label merchandise intermixed. Each store is typically staffed with a manager, assistant manager and other employees who serve as customer service and sales personnel and cashiers. Each store also has a tailoring facility with at least one tailor.

 

We lease our stores on terms generally from five to ten years with renewal options at higher fixed rates in most cases. Leases typically provide for percentage rent over sales break points. Additionally, most leases provide for a base rent as well as “triple net charges”, including but not limited to common area maintenance expenses, property taxes, utilities, center promotions and insurance. In certain markets, we lease between 5,000 and 30,300 additional square feet as a part of a Men’s Wearhouse store or in a separate hub warehouse unit to be utilized as a redistribution facility in that geographic area.

We lease or own properties in various parts of the U.S. and Canada to facilitate the distribution of retail and rental product to our stores. In addition, we have primary office locations in Houston, Texas and Fremont, California with additional satellite offices in other parts of the U.S. and Canada. The following is a listing of all owned and leased non-store facilities as of February 2, 2008:

 

 

 

 

 

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.

 

 

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended February 2, 2008.

 

 

Our common stock is traded on the New York Stock Exchange under the symbol “MW.” The following table sets forth, on a per share basis for the periods indicated, the high and low sale prices per share for our common stock as reported by the New York Stock Exchange and the quarterly dividends declared on each share of common stock:

 

 

On March 28, 2008, there were approximately 1,500 holders of record and approximately 16,400 beneficial holders of our common stock.

 

In January 2008, our Board of Directors declared a quarterly cash dividend of $0.07 per share of our common stock payable on March 28, 2008 to shareholders of record on March 18, 2008. The dividend payout is approximately $3.6 million.

 

Issuer Purchases of Equity Securities

 

During fiscal 2007, we repurchased 2,985,190 shares of our common stock at an average price of $35.54 for an aggregate cost of approximately $106.1 million. The following table presents information with respect to purchases of common stock of the Company made during the quarter ended February 2, 2008 as defined by Rule 10b-18(a)(3) under the Exchange Act:

 

Performance Graph

 

The following Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.

 

The following graph compares, as of each of the dates indicated, the percentage change in the Company’s cumulative total shareholder return on the Common Stock with the cumulative total return of the NYSE Composite Index and the Retail Specialty Apparel Index. The graph assumes that the value of the investment in the Common Stock and each index was $100 at February 1, 2003 and that all dividends paid by those companies included in the indices were reinvested.

 

 

 

The foregoing graph is based on historical data and is not necessarily indicative of future performance.

 

The following selected statement of earnings, balance sheet and cash flow information for the fiscal years indicated has been derived from our audited consolidated financial statements. The Selected Financial Data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and notes thereto. References herein to years are to the Company’s 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 fiscal year ended February 2, 2008. All fiscal years for which financial information is included herein had 52 weeks, except 2006 which had 53 weeks.

 

As a result of the acquisition of After Hours on April 9, 2007, the statement of earnings data and the cash flow information below for the year ended February 2, 2008 include the results of operations and cash flows, respectively, of After Hours beginning April 10, 2007. In addition, the balance sheet information below as of February 2, 2008 includes estimates of the fair values of the assets acquired and liabilities assumed as of the acquisition date for After Hours.

 

 

 

 

 

 

 

 

General

 

The Men’s Wearhouse, Inc. is a specialty apparel retailer offering suits, sport coats, pants, shoes, shirts, sportswear, outerwear and accessories for men and tuxedo rentals. We offer our products and services through multiple channels including The Men’s Wearhouse, K&G, Moores Clothing for Men, MW Tux and on the internet at www.tmw.com. Our stores are located throughout the United States and Canada and carry a wide selection of brand name and private label merchandise. In addition, we offer our customers a variety of services, including alterations and our loyalty program.

 

Overview

 

At February 2, 2008, we operated 784 retail apparel stores, with 668 stores in the United States and 116 stores in Canada, and 489 tuxedo rental stores. Our U.S. retail apparel stores are operated under the brand names of Men’s Wearhouse (563 stores) and K&G (105 stores) in 46 states and the District of Columbia. Our Canadian stores are operated under the brand name of Moores Clothing for Men in ten provinces. Our tuxedo rental stores are operated under the brand name of MW Tux in 35 states.

 

For 2007, we had revenues of $2.113 billion and net earnings of $147.0 million, compared to revenues of $1.882 billion and net earnings of $148.6 million in 2006 and revenues of $1.725 billion and net earnings of $103.9 million in 2005. The more significant factors impacting these results are addressed in the “Results of Operations” discussion below.

 

On April 9, 2007, we expanded our tuxedo rental operations by acquiring After Hours from Federated Department Stores, Inc. for cash of approximately $69.8 million. At the time of the acquisition, After Hours had 509 stores in the U.S. We closed a net 20 stores and rebranded the remaining stores to MW Tux. As a percentage of total revenues, tuxedo rentals have grown from 5.6% in 2005 to 6.3% in 2006 and 15.4% in 2007. The 2007 revenues include revenues from the acquired After Hours stores beginning on April 10, 2007.

 

We opened 18 stores in 2005, 35 stores in 2006 and 42 stores in 2007 under our Men’s Wearhouse, MW Tux, K&G and Moores brands. In 2008, we plan to open approximately 20 new Men’s Wearhouse stores, one new Moores store, 22 new MW Tux stores and three new K&G stores and to expand and/or relocate approximately 16 existing Men’s Wearhouse stores, 26 existing MW Tux stores and one existing K&G store.

 

In 2005, four stores were closed due to substandard performance or lease expiration and two stores were closed due to demographic changes in the proximity of a newly opened store. In 2006, two stores were closed due to lease expiration. In 2007, we closed 27 stores due to the integration of After Hours into our operations; we also closed two Men’s Wearhouse stores due to lease expirations. We plan to close eight MW Tux stores and one K&G store in 2008.

Results of Operations

 

The following table sets forth the Company’s results of operations expressed as a percentage of net sales for the periods indicated:

 

 

2007 Compared with 2006

 

The Company’s net sales increased $230.5 million, or 12.3%, to $2.113 billion for 2007 due mainly to a $205.8 million increase in tuxedo rental revenues, a $14.9 million increase in clothing product sales and a $7.0 million increase in alteration service revenues. The components of this $230.5 million increase in net sales are further detailed as follows:

 

 

The increase of $205.8 million in tuxedo rental revenues was due to the After Hours acquisition as shown above and a 17.8% increase in our existing tuxedo rental operations in the U.S. and Canada. As a percentage of total revenues, combined U.S. and Canadian tuxedo rental revenues increased from 6.3% in fiscal 2006 to 15.4% in fiscal 2007. Our 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) decreased 0.4% at our Men’s Wearhouse stores, while our K&G comparable store sales decreased 10.9%, resulting in a 3.0% decrease in comparable sales for our U.S. stores in fiscal 2007. The decreases for the year were significantly influenced by results for the fourth quarter of 2007, when comparable sales decreased by 5.4% and 17.2% for Men’s Wearhouse and K&G stores, respectively. These decreases were primarily due to declining traffic levels caused by the economic slowdown in the U.S. that accelerated during the peak holiday selling season. In Canada, comparable

store sales increased 1.5% for the year but declined 7.3% in the fourth quarter, also primarily as a result of reduced traffic levels during the holiday selling season.

 

Our gross margin continued to increase as shown in the table below:

 

 

Buying and distribution costs are included in determining our clothing product and total gross margins. Our gross margin may not be comparable to other specialty retailers, as some companies exclude costs related to their distribution network from cost of goods sold while others, like us, include all or a portion of such costs in cost of goods sold and exclude them from selling, general and administrative expenses.

 

Gross margin increased $154.4 million, or 18.9%, to $970.1 million in 2007. Of this increase, $48.4 million resulted from our clothing product margin increasing from 54.7% in 2006 to 57.2% in 2007, due mainly to lower product costs from increased direct sourcing of merchandise. Gross margin from our tuxedo, alteration and other services increased by $169.2 million as a result of our After Hours acquisition and continued growth in our tuxedo rental services, which carry a significantly higher incremental gross margin than our clothing product sales. These increases were partially offset by a $63.2 million or 30.3% increase in occupancy cost, which includes store related rent, common area maintenance, utilities, repairs and maintenance, security, property taxes and depreciation. Occupancy costs increased in fiscal 2007 due to our increased store count, mainly from the acquisition of After Hours, and renewals of existing leases at higher rates.

 

Selling, general and administrative (“SG&A”) expenses increased to $741.4 million in fiscal 2007 from $591.8 million in fiscal 2006, an increase of $149.6 million or 25.3%. As a percentage of sales, these expenses increased from 31.4% in 2006 to 35.1% in 2007. The components of this 3.7% net increase in SG&A expenses as a percentage of net sales are as follows:

 

 

Interest expense decreased from $9.2 million in 2006 to $5.0 million in 2007 while interest income decreased from $9.8 million in 2006 to $6.0 million in 2007. Weighted average borrowings outstanding decreased from $202.1 million in the prior year to $86.4 million in 2007, and the weighted average interest rate on outstanding indebtedness increased from 3.3% in 2006 to 5.5% in 2007. The decrease in weighted average borrowings and increase in weighted average interest rate is due to our election to redeem our $130.0 million 3.125% Convertible Senior Notes due 2023 (“Notes”) in the fourth quarter of 2006. For additional information regarding our borrowings, refer to Note 4 of Notes to Consolidated Financial Statements and the “Liquidity and Capital Resources” discussion herein. The decrease in interest income primarily resulted from decreases in our average cash and short-term investment balances.

Our effective income tax rate increased from 33.8% in 2006 to 36.0% in 2007 due primarily to the absence of the favorable developments on certain outstanding income tax matters that occurred in 2006.

 

These factors resulted in 2007 net earnings of $147.0 million or 7.0% of net sales, compared with 2006 net earnings of $148.6 million or 7.9% of net sales.

 

2006 Compared with 2005

 

The Company’s net sales increased $157.2 million, or 9.1%, to $1.882 billion for 2006 due mainly to a $113.8 million increase in clothing product sales, a $17.5 million increase in alteration service revenues and a $23.3 million increase in tuxedo rental revenues. The components of this $157.2 million increase in net sales are as follows:

 

 

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 3.1%, while our K&G comparable store sales decreased 1.8%. 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. In Canada, comparable store sales increased 8.7% primarily as a result of improvement in the clothing average ticket, increased traffic and continued growth in our tuxedo rental business. As a percentage of total revenues, combined U.S. and Canadian tuxedo rental revenues increased from 5.6% in fiscal 2005 to 6.3% in fiscal 2006.

 

Gross margin increased $118.6 million, or 17.0%, to $815.7 million in 2006. As a percentage of sales, gross margin increased from 40.4% in 2005 to 43.3% in 2006. This increase in gross margin percentage resulted mainly from improvements in merchandise margins related to lower product costs and continued growth in our tuxedo rental business, which carries a significantly higher incremental gross margin impact than our traditional businesses. This increase in the gross margin percentage was partially offset by an increase in 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, from 2005 to 2006. On an absolute dollar basis, occupancy costs increased by 11.6% from 2005 to 2006 due mainly to our increased store count and renewals of existing leases at higher rates.

Selling, general and administrative (“SG&A”) expenses increased to $591.8 million in fiscal 2006 from $531.8 million in fiscal 2005, an increase of $60.0 million or 11.3%. As a percentage of sales, these expenses increased from 30.8% in 2005 to 31.4% in 2006. The components of this 0.6% net increase in SG&A expenses as a percentage of net sales are as follows:

 

 

Interest expense increased from $5.9 million in 2005 to $9.2 million in 2006 while interest income increased from $3.3 million in 2005 to $9.8 million in 2006. Weighted average borrowings outstanding increased from $130.8 million in the prior year to $202.1 million in 2006, and the weighted average interest rate on outstanding indebtedness remained constant at 3.3%. The increase in weighted average borrowings is due to Canadian term loan borrowings of US$75.0 million in January 2006 that were used to fund the repatriation of foreign earnings from our Canadian subsidiaries under the American Jobs Creation Act of 2004. This increase was offset slightly by our election to redeem our $130.0 million 3.125% Convertible Senior Notes due 2023 (“Notes”) in the fourth quarter of 2006. For additional information regarding the redemption of our Notes, refer to Note 4 of Notes to Consolidated Financial Statements and the “Liquidity and Capital Resources” discussion herein. The increase in interest income primarily resulted from increases in our average cash and short-term investment balances and higher interest rates.

 

Our effective income tax rate decreased from 36.1% in 2005 to 33.8% in 2006 due primarily to favorable developments on certain outstanding income tax matters and an increase in the amount of tax exempt interest income for the current fiscal year. Excluding the adjustments to tax reserves associated with the favorable developments on certain outstanding income tax matters, our effective tax rate would have been 36.1% for fiscal 2006.

 

These factors resulted in 2006 net earnings of $148.6 million or 7.9% of net sales, compared with 2005 net earnings of $103.9 million or 6.0% of net sales.

 

Liquidity and Capital Resources

 

Our Amended and Restated Credit Agreement (the “Credit Agreement”) with a group of banks, which was last amended on February 2, 2007, provides for a total senior secured revolving credit facility of $200.0 million, which can be expanded to $250.0 million upon additional lender commitments, that matures on February 11, 2012. 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 revolving credit facility and the Canadian term loan was 6.0% and 4.8% at February 2, 2008, respectively. As of February 2, 2008, there was $5.4 million outstanding under the revolving credit facility and there was US$87.0 million outstanding under the Canadian term loan. Borrowings under the revolving credit facility were $59.8 million as of March 31, 2008.

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 February 2, 2008.

 

On October 21, 2003, we issued $130.0 million of 3.125% Convertible Senior Notes due 2023 (“Notes”) 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.

 

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. 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 for inventory purchases. At February 2, 2008, letters of credit totaling approximately $14.8 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, February 3, 2007 and May 5, 2007. A quarterly cash dividend of $0.06 per share was paid during each of the quarters ended August 4, 2007, November 3, 2007 and February 2, 2008. Cash dividends paid were $12.4 million for the fiscal year ended February 2, 2008. In January 2008, our Board of Directors declared a quarterly cash dividend of $0.07 per share of our common stock payable on March 28, 2008 to shareholders of record on March 18, 2008. The dividend payout is approximately $3.6 million and is included in accrued expenses as of February 2, 2008.

 

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. 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 $69.8 million.

 

Our primary sources of working capital are cash flow from operations and, if necessary, borrowings under the Credit Agreement. We had working capital of $491.5 million, $454.7 million and $393.7 million at the end of 2005, 2006 and 2007, respectively. 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 $61.0 million decrease in working capital at February 2, 2008 compared to February 3, 2007 resulted primarily from the acquisition of After Hours and purchases of treasury stock.

 

Our operating activities provided net cash of $154.6 million in 2005, $160.8 million in 2006 and $204.9 million in 2007 mainly because cash provided by net earnings, as adjusted for non-cash charges, more than offset cash used

for increases in inventories and tuxedo rental product and decreases in accounts payable, accrued expenses and other current liabilities. Inventories increased in each of the years due mainly to increased selling square footage and, in 2007, an increase of $7.7 million in corporate uniform product, while tuxedo rental product increased to support the continued growth in our tuxedo rental business and to replenish product. The decreases in accounts payable, accrued expenses and other current liabilities relate mainly to the timing of vendor payments. In 2007, income taxes payable decreased because actual earnings were lower than amounts used to estimate required tax payments.

 

Our investing activities used net cash of $129.4 million, $11.6 million and $254.3 million in 2005, 2006 and 2007, respectively. We made capital expenditures of $66.5 million, $72.9 million and $126.1 million in 2005, 2006 and 2007, respectively, and net purchases of short-term investments of $62.8 million in 2005 and $59.9 million in 2007. In addition, our acquisition of After Hours in 2007 used net cash of $68.2 million. In 2006, we had net proceeds from short-term investments of $62.8 million. As of February 2, 2008, we held $59.9 million in short-term investments consisting of commercial paper.

 

Our capital expenditures relate to costs incurred for stores opened, remodeled or relocated during the year or under construction at the end of the year, distribution facility additions and infrastructure technology investments as detailed below. The following table details our capital expenditures (in millions):

 

 

Property additions relating to new retail apparel stores include stores in various stages of completion at the end of the fiscal year (twelve stores at the end of 2005, one store at the end of 2006 and eight stores at the end of 2007). In addition, other capital expenditures in 2007 include $22.4 million of capital expenditures for our relocated corporate office facilities and data center.

 

In 2005, net cash provided by financing activities was $5.1 million due mainly to borrowings under our Credit Agreement used to fund the repatriation of $US74.7 million of foreign earnings from our Canadian subsidiaries and proceeds from the issuance of our common stock for options exercised, offset by purchases of treasury stock. In June 2004, the Board of Directors authorized a program for the repurchase of up to $50.0 million of our common stock in the open market or in private transactions. During fiscal 2005, we had repurchased under the June 2004 program 1,503,750 shares at a cost of $40.5 million in open market transactions at an average price per share of $26.93. In May 2005, the Board of Directors approved a replenishment of our share repurchase program to $50.0 million by authorizing $43.0 million to be added to the remaining $7.0 million under the June 2004 authorization program. During the remainder of fiscal 2005, a total of 1,696,000 shares at a cost of $49.8 million were repurchased in open market transactions under the May 2005 replenishment program at an average price per share of $29.36. During fiscal 2005, a total of 3,199,750 shares at a cost of $90.3 million were repurchased in open market transactions under all authorized programs at an average price per share of $28.21. In January 2006, the Board of Directors authorized a $100.0 million share repurchase program of our common stock. This authorization superseded any remaining previous authorizations. No shares were repurchased under this program as of January 28, 2006.

 

In 2006, our financing activities used net cash of $168.2 million due mainly to redemption of our 3.125% Convertible Senior Notes due 2023, purchases of treasury stock and cash dividends paid, offset partially by proceeds from the issuance of our common stock in connection with the exercise of stock options. During 2006, a total of 1,134,000 shares at a cost of $40.3 million were repurchased in open market transaction under the January 2006 authorization at an average price per share of $35.53.

In 2007, our financing activities used net cash of $104.4 million due mainly to the purchase of treasury stock and cash dividends paid, offset partially by proceeds from the issuance of common stock and excess tax benefits in connection with stock based compensation. In August 2007, the Company’s Board of Directors approved a replenishment of the Company’s share repurchase program to $100.0 million by authorizing $90.3 million to be added to the remaining $9.7 million of the then current program. During fiscal 2007, we repurchased under the January 2006 program and subsequent August 2007 replenishment 2,985,190 shares at a cost of $106.1 million in open market and private transactions at an average price of $35.54.

 

The following table summarizes our share repurchases over the last three fiscal years:

 

 

Our primary cash requirements are to finance working capital increases as well as to fund capital expenditure requirements which are anticipated to be approximately $74.2 million for 2008. This amount includes the anticipated costs of opening approximately 20 new Men’s Wearhouse stores, 22 new MW Tux stores, three new K&G stores and one new Moores store in 2008 at an expected average cost per store of approximately $0.4 million (excluding telecommunications and point-of-sale equipment and inventory). The balance of the capital expenditures for 2008 will be used for telecommunications, point-of-sale and other computer equipment and systems, store relocations, remodeling and expansion and investment in complimentary services and concepts. The Company anticipates that each of the 20 new Men’s Wearhouse stores and each of the three new K&G stores will require, on average, an initial inventory costing approximately $0.4 million and $0.6 million, respectively (subject to the seasonal patterns that affect inventory at all stores), which will be funded by our revolving credit facility, trade credit and cash from operations. The actual amount of future capital expenditures and inventory purchases will depend in part on the number of new stores opened and the terms on which new stores are leased. Additionally, we may have opportunities to acquire retail chains larger than our past acquisitions. Any such acquisitions may be undertaken as an alternative to opening new stores. We may use cash on hand, together with cash flow from operations, borrowings under our revolving credit facility and issuances of equity securities, to take advantage of significant acquisition opportunities.

 

On March 3, 2008, we announced our decision to close our Montreal, Quebec-based manufacturing facility operated by Golden Brand Clothing (Canada) Ltd, an indirect wholly owned subsidiary of the Company. Despite previous reductions in production over the last three years, the strengthening Canadian dollar and the increasing pace of imports by our competitors have caused us to reach the decision to close the manufacturing facility and to use other alternate production sources. We expect the closure to occur in or around July 2008.

 

We expect the total pre-tax charge to be incurred in connection with the closure of the Montreal manufacturing facility to be approximately $8.5 million, which consists primarily of severance payments, the write-off of fixed assets, lease termination payments and costs to finalize the clean-up and closing of the facility. We also estimate that approximately $7.3 million of the charge will result in future cash expenditures.

 

We anticipate that our existing cash and cash flow from operations, supplemented by borrowings under our Credit Agreement, will be sufficient to fund 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 two 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 two financial institutions, we anticipate full performance and access to our deposits and liquid investments.

Contractual Obligations

 

As of February 2, 2008, the Company is obligated to make cash payments in connection with its long-term debt, noncancelable capital and operating leases and other contractual obligations in the amounts listed below. In addition, we utilize letters of credit primarily for inventory purchases. At February 2, 2008, letters of credit totaling approximately $14.8 million were issued and outstanding.

 

 

 

 

Off-Balance Sheet Arrangements

 

Other than the noncancelable operating leases, other contractual obligations and letters of credit discussed above, the Company does not have any off-balance sheet arrangements that are material to its financial position or results of operations.

 

Inflation

 

The impact of inflation on the Company has been minimal.

 

Critical Accounting Estimates

 

The preparation of our consolidated financial statements requires the appropriate application of accounting policies in accordance with generally accepted accounting principles. In many instances, this also requires management to make estimates and assumptions about future events that affect the amounts and disclosures included in our financial statements. We base our estimates on historical experience and various assumptions that we believe are reasonable under the circumstances. However, since future events and conditions and their effects

cannot be determined with certainty, actual results will differ from our estimates and such differences could be material to our financial statements.

 

Our accounting policies are described in Note 1 of Notes to Consolidated Financial Statements. We consistently apply these policies and periodically evaluate the reasonableness of our estimates in light of actual events. Historically, we have found our critical accounting policies to be appropriate and our estimates and assumptions reasonable. We believe our critical accounting policies and our most significant estimates are those that relate to inventories and long-lived assets, including goodwill, amortization of the cost of our tuxedo rental product, our estimated liabilities for the self-insured portions of our workers’ compensation and employee health benefit costs, our income taxes, and our operating lease accounting.

 

Our inventory is carried at the lower of cost or market. Cost is determined on the average cost method for approximately 75% of our inventory and on the retail inventory method for the remaining 25% (primarily K&G inventories). Our inventory cost also includes estimated buying and distribution costs (warehousing, freight, hangers and merchandising costs) associated with the inventory, with the balance of such costs included in cost of sales. We make assumptions, based primarily on historical experience, as to items in our inventory that may be damaged, obsolete or salable only at marked down prices and reduce the cost of inventory to reflect the market value of these items. If actual damages, obsolescence or market demand is significantly different from our estimates, additional inventory write-downs could be required. In addition, buying and distribution costs are allocated to inventory based on the ratio of annual product purchases to inventory cost. If this ratio were to change significantly, it could materially affect the amount of buying and distribution costs included in cost of sales.

 

We make judgments about the carrying value of long-lived assets, such as property and equipment and amortizable intangibles, and the recoverability of goodwill whenever events or changes in circumstances indicate that an other-than-temporary impairment in the remaining value of the assets recorded on our balance sheet may exist. We test goodwill for impairment annually in the fourth quarter of each year or more frequently if circumstances dictate. The impairment review is based on a discounted cash flow approach at the reporting unit level that requires significant management judgment with respect to sales, gross margin and expense growth rates, and the selection and use of an appropriate discount rate. The use of different assumptions would increase or decrease estimated discounted future operating cash flows and could increase or decrease an impairment charge. The occurrence of an unexpected event or change in circumstances, such as adverse business conditions or other economic factors, would determine the need for impairment testing between annual impairment tests. Our assumptions can be affected by a variety of factors, including external factors, such as industry and economic trends, and internal factors, such as changes in our business strategy and our internal forecasts. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results. No impairment charges were recorded in 2006 and 2007.

 

The cost of our tuxedo rental product is amortized to cost of sales based on the cost of each unit rented, which is estimated based on the number of times the unit is expected to be rented and the average cost of the rental product. Lost and damaged rental product is also charged to cost of sales. Tuxedo rental product is amortized to expense generally over a two to three year period. We make assumptions, based primarily on historical experience and information obtained from tuxedo rental industry sources, as to the number of times each unit can be rented. If the actual number of times a unit can be rented were to vary significantly from our estimates, it could materially affect the amount of tuxedo rental product amortization included in cost of sales.

 

We self-insure significant portions of our workers’ compensation and employee medical costs. We estimate our liability for future payments under these programs based on historical experience and various assumptions as to participating employees, health care costs, number of claims and other factors, including industry trends and information provided to us by our insurance broker. We also use actuarial estimates. If the number of claims or the costs associated with those claims were to increase significantly over our estimates, additional charges to earnings could be necessary to cover required payments.

 

Significant judgment is required in determining the provision for income taxes and the related taxes payable and deferred tax assets and liabilities since, in the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, our tax returns are subject to audit by

various domestic and foreign tax authorities that could result in material adjustments or differing interpretations of the tax laws. Although we believe that our estimates are reasonable and are based on the best available information at the time we prepare the provision, actual results could differ from these estimates resulting in a final tax outcome that may be materially different from that which is reflected in our consolidated financial statements.

 

Our operating leases primarily relate to stores and generally contain rent escalation clauses, rent holidays, contingent rent provisions and occasionally leasehold incentives. We recognize rent expense for operating leases on a straight-line basis over the term of the lease, which is generally five to ten years based on the initial lease term plus first renewal option periods that are reasonably assured. The lease terms commence when we take possession with the right to control use of the leased premises and, for stores, is generally 60 days prior to the date rent payments begin. Prior to fiscal 2006, we capitalized rent amounts allocated to the construction period for leased properties as leasehold improvements. In fiscal 2006, we adopted Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) No. FAS 13-1 (“FSP 13-1”), “Accounting for Rental Costs Incurred during a Construction Period,” which requires that rental costs associated with ground or building operating leases that are incurred during a construction period be recognized as rental expense (see Note 1 of Notes to Consolidated Financial Statements for further discussion regarding FSP 13-1). Deferred rent that results from recognition of rent on a straight-line basis is included in other liabilities. Landlord incentives received for reimbursement of leasehold improvements are recorded as deferred rent and amortized as a reduction to rent expense over the term of the lease.

 

Impact of Recently Issued Accounting Pronouncements

 

In June 2006, the 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 uncertain tax positions. FIN 48 prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken on a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We adopted FIN 48 as of the beginning of fiscal year 2007, which resulted in a $1.1 million increase to our liability for uncertain tax positions. The increase was recorded as a cumulative effect adjustment to retained earnings.

 

In accordance with FIN 48, we classify uncertain tax positions as non-current income tax liabilities unless they are expected to be paid within one year and we recognize interest and/or penalties related to income tax matters in income tax expense. See Note 5 of Notes to Consolidated Financial Statements for further information about income taxes.

 

In June 2006, the 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 which resulted in an additional accrued liability of $8.2 million, additional deferred tax assets of $3.2 million and a reduction to retained earnings of $5.0 million. The adoption of EITF 06-02 resulted in additional pre-tax expenses of approximately $1.3 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. EITF 06-03 was effective for fiscal years beginning after December 15, 2006. The adoption of EITF 06-03 had no effect on our financial position, results of operations or cash flows.

 

In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), which provides interpretive guidance regarding the consideration given to prior year misstatements when

determining materiality in current year financial statements. SAB 108 is effective for fiscal years ending after November 15, 2006. The adoption of SAB 108 did not have a material impact 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 do not expect the adoption of SFAS 157 to have any material impact on our financial position, results of operations or 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 do not expect the adoption of SFAS 159 to have any material impact on our financial position, results of operations or 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.

 

 

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 revolving credit facility of $5.4 million and our Canadian term loan of US$87.0 million at February 2, 2008, which both bear a variable interest rate (see Note 4 of Notes to 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.

 

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed under the supervision of our principal executive and principal financial officers, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

 

Our management assessed the effectiveness of our internal control over financial reporting as of the end of our most recent fiscal year. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. Based on such assessment, management concluded that, as of February 2, 2008, our internal control over financial reporting is effective based on those criteria.

 

Management’s assessment of the effectiveness of our internal control over financial reporting as of February 2, 2008 has been audited by Deloitte & Touche LLP, the independent registered public accounting firm that audited our consolidated financial statements included in this report, as stated in their report which appears on page 33 of this Annual Report on Form 10-K.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

The Men’s Wearhouse, Inc.

Houston, Texas

 

We have audited the internal control over financial reporting of The Men’s Wearhouse, Inc. and subsidiaries (the “Company”) as of February 2, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 2, 2008, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended February 2, 2008 of the Company and our report dated April 1, 2008 expressed an unqualified opinion on those financial statements and financial statement schedule.

 

/s/ DELOITTE & TOUCHE LLP

 

Houston, Texas

April 1, 2008

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

The Men’s Wearhouse, Inc.

Houston, Texas

 

We have audited the accompanying consolidated balance sheets of The Men’s Wearhouse, Inc. and subsidiaries (the “Company”) as of February 2, 2008 and February 3, 2007, and the related consolidated statements of earnings, shareholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended February 2, 2008. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Men’s Wearhouse, Inc. and subsidiaries as of February 2, 2008 and February 3, 2007, and the results of their operations and their cash flows for each of the three years in the period ended February 2, 2008, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of February 2, 2008, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 1, 2008 expressed an unqualified opinion on the Company’s internal control over financial reporting.

 

/s/ DELOITTE & TOUCHE LLP

 

Houston, Texas

April 1, 2008

THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

 

The accompanying notes are an integral part of these consolidated financial statements.

THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS
For the Years Ended
January 28, 2006, February 3, 2007 and February 2, 2008