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MW > SEC Filings for MW > Form 10-K on 3-Apr-2013All Recent SEC Filings

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Form 10-K for MENS WEARHOUSE INC


3-Apr-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

The Men's Wearhouse, Inc. is a men's specialty apparel retailer offering suits, suit separates, sport coats, slacks, sportswear, outerwear, dress shirts, shoes and accessories and tuxedo rentals. We offer our products and services through multiple channels including The Men's Wearhouse, Men's Wearhouse and Tux, Moores Clothing for Men, K&G and the internet at www.menswearhouse.com and www.kgstores.com. Our stores are located throughout the U.S. and Canada and carry a wide selection of exclusive and non-exclusive merchandise brands. In addition, we offer our customers a variety of services, including alterations and our loyalty program, and most of our K&G stores offer ladies' career apparel, sportswear, accessories and shoes, and children's apparel. We also conduct retail dry cleaning, laundry and heirlooming operations through MW Cleaners in the Houston, Texas area. These operations comprise our retail segment.

Additionally, we operate two corporate apparel providers-our UK-based holding company operations, the largest provider in the UK under the Dimensions, Alexandra and Yaffy brands, and our Twin Hill operations in the U.S. These operations provide corporate clothing uniforms and workwear to workforces through multiple channels including managed corporate accounts, catalogs and the internet. The Company acquired 86% of the UK-based holding company in 2010. Certain previous shareholders of Dimensions control 14% of the UK-based holding company and the Company has the right to acquire this 14% after fiscal 2013. These operations comprise our corporate apparel segment. Refer to Note 2 of Notes to Consolidated Financial Statements for further details regarding the acquisitions.

Refer to Note 14 of Notes to Consolidated Financial Statements for additional information and disclosures regarding our reportable segments and the discussion included in "Results of Operations" below.

We follow the standard fiscal year of the retail industry, which is a 52-week or 53-week period ending on the Saturday closest to January 31. Fiscal year 2012 ended on February 2, 2013, fiscal year 2011 ended on January 28, 2012 and fiscal year 2010 ended on January 29, 2011. Fiscal year 2012 included 53 weeks and fiscal years 2011 and 2010 each included 52 weeks.

In March 2013, we announced that we have engaged Jefferies & Co. to assist us in evaluating strategic alternatives for our K&G operations. We believe that our core strengths lie primarily in our service culture and specialty men's apparel retailing, and that we will be better able to focus our efforts on these core operations by taking this action.


Table of Contents

Overview

Highlights of the Company's performance for the year ended February 2, 2013, a 53-week fiscal year, compared to the prior year are presented below, followed by a more comprehensive discussion under "Results of Operations":


Revenues for fiscal 2012 increased by $105.6 million or 4.4% to $2,488.3 million compared to revenues of $2,382.7 million in fiscal 2011.


Gross margin for fiscal 2012 increased by $59.2 million or 5.6% to $1,108.1 million compared to $1,048.9 million in fiscal 2011. Gross margin as a percentage of total net sales for fiscal 2012 was 44.5% compared to 44.0% for fiscal 2011.


Selling, general and administrative ("SG&A") expenses for fiscal 2012 increased 5.5% to $909.1 million compared to SG&A expenses of $861.5 million in fiscal 2011 and increased 0.3% as a percentage of total net sales as compared to fiscal 2011.


Net earnings attributable to common shareholders for fiscal 2012 increased by $11.1 million or 9.2% to $131.7 million compared to $120.6 million in fiscal 2011.


Diluted earnings per common share attributable to common shareholders increased 10.9% to $2.55 per share for fiscal 2012 compared to $2.30 per share for fiscal 2011.


Net cash provided by our operating activities for fiscal 2012 was $225.7 million compared to $162.8 million in fiscal 2011. We held cash and cash equivalent balances of $156.1 million at February 2, 2013 and $125.3 million at January 28, 2012, an increase of $30.8 million.


During fiscal 2012 we paid cash dividends of $37.1 million.


During fiscal 2012 we repurchased 1,128,525 shares of our common stock for $41.3 million.

While we experienced improvement in both sales and profitability during fiscal 2012 as compared to the prior year, U.S. and global economic conditions remained volatile with high unemployment levels continuing in the U.S. We believe that our business is impacted by unemployment levels and that our customers are particularly sensitive to uncertain economic conditions that negatively impact consumer confidence and the level of consumer discretionary spending. However, we also believe that we are in a replenishment cycle in men's apparel that is being driven by an infrequent silhouette change in men's suits. About 20 years ago, the cycle was driven by wide shouldered and double breasted suits, and about ten years later it was driven by the three button suit. We are now seeing a much trimmer, slim fit shape in men's suits that is also influencing shirts and ties. We have expanded these products in our stores and our marketing channels to target the younger customer as well as the other demographics that are influenced by this trend and believe that the trend has contributed to our 2012 improved results.

During fiscal 2012, we opened 37 stores (33 Men's Wearhouse stores, three Moores stores and one K&G store) and closed 60 stores (two Men's Wearhouse stores due to substandard performance; two K&G stores due to substandard performance and one due to lease expiration; and 55 Men's Wearhouse and Tux stores: 34 due to lease expiration, 13 due to substandard performance, and 8 due to consolidation of operations with other existing Men's Wearhouse stores in the area).

In fiscal 2013, we plan to open approximately 32 to 36 Men's Wearhouse stores, three Moores stores and one K&G store and to expand and/or relocate approximately 20 existing Men's Wearhouse stores, one existing Moores store and five existing K&G stores. We also plan to close approximately four K&G stores and approximately 36 Men's Wearhouse and Tux stores as their lease terms expire or acceptable lease termination arrangements can be established.


Table of Contents

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:

                                                                   Fiscal Year(1)
                                                              2012      2011      2010
Net sales:
Retail clothing product                                         68.0 %    68.0 %    70.4 %
Tuxedo rental services                                          16.3      15.8      17.3
Alteration and other services                                    6.1       6.0       6.3

Total retail sales                                              90.4      89.8      94.0
Corporate apparel clothing product sales                         9.6      10.2       6.0

Total net sales                                                  100 %     100 %     100 %
Cost of sales(2):
Retail clothing product                                         44.7      44.7      46.1
Tuxedo rental services                                          13.9      14.0      15.4
Alteration and other services                                   75.3      75.6      74.6
Occupancy costs                                                 12.6      12.8      14.0

Total retail cost of sales                                      53.8      54.1      56.3
Corporate apparel clothing product cost of sales                71.1      72.4      72.5

Total cost of sales                                             55.5      56.0      57.3
Gross margin(2):
Retail clothing product                                         55.3      55.3      53.9
Tuxedo rental services                                          86.1      86.0      84.6
Alteration and other services                                   24.7      24.4      25.4
Occupancy costs                                                (12.6 )   (12.8 )   (14.0 )

Total retail gross margin                                       46.2      45.9      43.7
Corporate apparel clothing product gross margin                 28.9      27.6      27.5

Total gross margin                                              44.5      44.0      42.7
Asset impairment charges                                         0.0       0.1       0.3
Selling, general and administrative expenses                    36.5      36.2      37.6

Operating income                                                 8.0       7.8       4.8
Interest income                                                  0.0       0.0       0.0
Interest expense                                                (0.1 )    (0.1 )    (0.1 )

Earnings before income taxes                                     7.9       7.7       4.8
Provision for income taxes                                       2.6       2.7       1.6

Net earnings including noncontrolling interest                   5.3       5.1       3.2
Net (earnings) loss attributable to noncontrolling
interest                                                         0.0       0.0       0.0

Net earnings attributable to common shareholders.                5.3 %     5.1 %     3.2 %


(1)
Percentage line items may not sum to totals due to the effect of rounding.

(2)
Calculated as a percentage of related sales.


Table of Contents

2012 Compared with 2011

The Company's total net sales increased $105.6 million, or 4.4%, to $2,488.3 million for fiscal 2012 as compared to fiscal 2011.

Total retail sales increased $109.7 million, or 5.1%, to $2,248.8 million for fiscal 2012 as compared to fiscal 2011 due mainly to a $71.6 million increase in retail clothing product revenues, a $29.6 million increase in tuxedo rental services revenues and a $5.4 million increase in alteration services revenues. These increases are attributable to the following:

(in millions)                           Amount attributed to
  $        51.3   Increase in comparable sales.
           26.4   Increase in net sales from impact of 53rd week.
           24.3   Increase from net sales of stores opened in 2011, relocated
                  stores and expanded stores not yet included in comparable sales.
           17.2   Increase in net sales from 37 new stores opened in 2012.
           13.0   Increase in e-commerce, alteration and other services sales.

(20.5 ) Decrease in net sales resulting from closed stores. (2.0 ) Decrease in net sales resulting from change in U.S./Canadian dollar exchange rate.

$ 109.7 Increase in total retail sales.

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 4.8% at Men's Wearhouse/Men's Wearhouse and Tux, increased 1.5% at Moores and decreased 4.3% at K&G. The increase at Men's Wearhouse/Men's Wearhouse and Tux resulted primarily from increased average unit retails (net selling prices) and a slight increase in units sold per transaction that more than offset a decrease in average transactions per store. The increase at Moores was driven by increased units sold per transaction and increased average unit retails that more than offset a decrease in average transactions per store. The decrease at K&G was due to decreased units sold per transaction, decreased average transactions per store and a decrease in average unit retails. Tuxedo rental service revenues increased primarily due to increased unit rental rates and unit rentals as well as increased sales of tuxedo accessories.

Total corporate apparel clothing product sales decreased $4.1 million to $239.4 million for fiscal 2012 as compared to fiscal 2011. UK corporate apparel sales decreased $8.2 million due mainly to a lower level of customer directed new uniform rollouts in fiscal 2012 as compared to fiscal 2011, which included the largest single customer rollout in Dimensions' operating history. U.S. corporate apparel sales increased $4.1 million due primarily to increased sales from a large customer program and increased catalog sales.

The Company's gross margin was as follows:

                                                             Fiscal Year
                                                         2012           2011
    Gross margin (in thousands)                       $ 1,108,148    $ 1,048,927

    Gross margin as a percentage of related sales:
    Retail gross margin:
    Clothing product                                         55.3 %         55.3 %
    Tuxedo rental services                                   86.1 %         86.0 %
    Alteration and other services                            24.7 %         24.4 %
    Occupancy costs                                         (12.6 )%       (12.8 )%

    Total retail gross margin                                46.2 %         45.9 %
    Corporate apparel clothing product gross margin          28.9 %         27.6 %

    Total gross margin                                       44.5 %         44.0 %


Table of Contents

Buying and distribution costs are included in determining our retail and corporate apparel clothing product 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 SG&A expenses. Tuxedo distribution costs are not included in determining our tuxedo rental services gross margin but are included in SG&A expenses.

In the retail segment, total gross margin as a percentage of related sales increased from 45.9% in fiscal 2011 to 46.2% in fiscal 2012. On an absolute dollar basis total retail segment gross margin increased $57.2 million or 5.8% from fiscal 2011 to $1,039.0 million in fiscal 2012. The retail clothing product gross margin rate remained flat at 55.3% in fiscal 2011 and fiscal 2012, while on an absolute dollar basis, retail clothing product margin increased $39.2 million. The tuxedo rental services gross margin increased slightly from 86.0% in fiscal 2011 to 86.1% in fiscal 2012 primarily due to a decrease in per unit rental costs in 2012 offset by increased royalty expenses. Occupancy costs as a percentage of retail sales, 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, decreased from 12.8% in fiscal 2011 to 12.6% in fiscal 2012 mainly due to cost leverage from increased retail sales. On an absolute dollar basis, occupancy costs increased $10.1 million primarily due to higher rent and depreciation expense.

In the corporate apparel segment, total gross margin as a percentage of related sales increased from 27.6% in fiscal 2011 to 28.9% in fiscal 2012 mainly as a result of cost synergies following the consolidation of Dimensions and Alexandra distribution facilities and supporting service functions and changes in the sales mix. On an absolute dollar basis, corporate apparel gross margin increased $2.0 million as the cost synergies and sales mix changes more than offset the impact of decreased sales.

SG&A expenses increased to $909.1 million in fiscal 2012 from $861.5 million in fiscal 2011, an increase of $47.6 million or 5.5%. As a percentage of total net sales, these expenses increased from 36.2% in fiscal 2011 to 36.5% in fiscal 2012. The components of this 0.3% net increase in SG&A expenses as a percentage of total net sales and the related absolute dollar changes were as follows:

  %                                    Attributed to
  0.3   Increase in advertising expense as a percentage of total net sales from
        3.5% in fiscal 2011 to 3.8% in fiscal 2012. On an absolute dollar basis,
        advertising expense increased $10.1 million.
  0.0   Store salaries as a percentage of total net sales remained flat at 13.1% in
        fiscal 2011 and fiscal 2012. Store salaries on an absolute dollar basis
        increased $13.5 million primarily due to increased commissions associated
        with increased sales and increased store sales support salaries, offset
        partially by decreased store bonuses.
  0.0   Other SG&A expenses as a percentage of total net sales remained flat at
        19.6% in fiscal 2011 and fiscal 2012. On an absolute dollar basis, other
        SG&A expenses increased $24.0 million primarily due to increased
        payroll-related costs.

0.3 % Total

In the retail segment, SG&A expenses as a percentage of related net sales increased from 36.9% in fiscal 2011 to 37.5% in fiscal 2012. On an absolute dollar basis, retail segment SG&A expenses increased $54.1 million primarily due to increased advertising expense, store salaries and payroll-related costs.

In the corporate apparel segment, SG&A expenses as a percentage of related net sales decreased from 29.5% in fiscal 2011 to 27.3% in fiscal 2012. On an absolute dollar basis, corporate apparel segment SG&A expenses decreased $6.5 million primarily due to reduced UK operating expenses following the consolidation of Dimensions and Alexandra distribution facilities and supporting service functions and the absence in fiscal 2012 of $3.8 million in integration costs incurred in fiscal 2011 associated with our August 2010 UK acquisitions.


Table of Contents

Corporate apparel segment operating income of $3.9 million for fiscal 2012 includes $7.4 million of operating income in the UK and $3.5 million of operating losses in the U.S.

Our effective income tax rate was 33.2% for fiscal 2012 and 34.7% for fiscal 2011. The effective tax rate for fiscal 2012 was lower than the statutory U.S. federal rate of 35% due to the favorable tax rate effects from lower foreign statutory tax rates imposed on our foreign operations, benefits from the conclusion of various income tax audits and recognition of previously unrecognized tax benefits and related accrued interest from expirations of statutes of limitations, partially offset by the tax rate effect of state income taxes and the establishment of a valuation allowance based on our assumptions about our ability to utilize foreign tax credits carryforwards before such credits expire. The effective tax rate for fiscal 2011 was lower than the statutory U.S. federal rate of 35% due to the favorable tax rate effects from net permanent book-to-tax adjustments, lower foreign statutory tax rates imposed on our foreign operations and recognition of previously unrecognized tax benefits and related accrued interest from expirations of statutes of limitations, offset partially by the effect of state income taxes. As of February 2, 2013, we had $3.9 million in unrecognized tax benefits, of which $2.8 million, if recognized, would reduce our income tax expense and effective tax rate. It is reasonably possible that there would be a reduction in the balance of unrecognized tax benefits of up to $1.2 million in the next twelve months.

These factors resulted in net earnings attributable to common shareholders of $131.7 million or 5.3% of total net sales for fiscal 2012, an increase of $11.1 million or 9.2% over net earnings of $120.6 million or 5.1% of total net sales for fiscal 2011.

2011 Compared with 2010

The Company's total net sales increased $280.0 million, or 13.3%, to $2,382.7 million for fiscal 2011 as compared to fiscal 2010.

Total retail sales increased $162.8 million, or 8.2%, to $2,139.2 million for fiscal 2011 as compared to fiscal 2010 due mainly to a $139.2 million increase in retail clothing product revenues, a $12.6 million increase in tuxedo rental services revenues and a $9.8 million increase in alteration services revenues. These increases are attributable to the following:

 (in millions)                          Amount attributed to
  $       133.9   Increase in comparable sales.
           22.0   Increase in e-commerce, alteration and other services sales.
           13.4   Increase from net sales of stores opened in 2010, relocated
                  stores and expanded stores not yet included in comparable sales.
           11.4   Increase in net sales from 25 new stores opened in 2011.

(26.6 ) Decrease in net sales resulting from closed stores.
8.7 Increase in net sales resulting from change in U.S./Canadian dollar exchange rate.

$ 162.8 Increase in total retail sales.

Comparable store sales increased 9.1% at Men's Wearhouse/Men's Wearhouse and Tux, 4.5% at Moores and 3.6% at K&G, with the increases primarily due to increased retail clothing product sales. Increases at Men's Wearhouse/Men's Wearhouse and Tux and Moores were driven by increased units sold per transaction that more than offset a decrease in average unit retails and a decrease in the average number of transactions per store. Increases at K&G were driven by increased average unit retails and units sold per transaction that more than offset a decrease in the average number of transactions per store. Tuxedo rental service revenues increased due to both higher average rental rates and higher paid rental units in the U.S.

Total corporate apparel clothing product sales increased $117.2 million in fiscal 2011 as compared to fiscal 2010 due mainly to a $113.3 million increase in sales from the UK corporate apparel operations acquired on August 6, 2010.


Table of Contents

The Company's gross margin was as follows:

                                                             Fiscal Year
                                                          2011          2010
     Gross margin (in thousands)                       $ 1,048,927    $ 898,433

     Gross margin as a percentage of related sales:
     Retail gross margin:
     Clothing product                                         55.3 %       53.9 %
     Tuxedo rental services                                   86.0 %       84.6 %
     Alteration and other services                            24.4 %       25.4 %
     Occupancy costs                                         (12.8 )%     (14.0 )%

     Total retail gross margin                                45.9 %       43.7 %
     Corporate apparel clothing product gross margin          27.6 %       27.5 %

     Total gross margin                                       44.0 %       42.7 %

Buying and distribution costs are included in determining our retail and corporate apparel clothing product 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 SG&A expenses. Tuxedo distribution costs are not included in determining our tuxedo rental services gross margin but are included in SG&A expenses.

In the retail segment, total gross margin as a percentage of related sales increased from 43.7% in fiscal 2010 to 45.9% in fiscal 2011. On an absolute dollar basis total retail segment gross margin increased $118.1 million or 13.7% from fiscal 2010 to $981.8 million in fiscal 2011. Retail clothing product gross margin increased from 53.9% in fiscal 2010 to 55.3% in fiscal 2011 due primarily to a favorable sales mix trend to higher margin product and lower K&G product cost charge-offs in 2011. The tuxedo rental services gross margin increased from 84.6% in fiscal 2010 to 86.0% in fiscal 2011 due primarily to decreased tuxedo rental amortization costs in 2011. 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, decreased from 14.0% in fiscal 2010 to 12.8% in fiscal 2011 primarily due to reduced depreciation following impairment charges taken in 2010 and 2011 and cost leverage from increased sales.

In the corporate apparel segment, total gross margin as a percentage of related sales increased slightly from 27.5% in fiscal 2010 to 27.6% in fiscal 2011 due to our UK corporate apparel operations acquired on August 6, 2010.

Non-cash asset impairment charges were $2.0 million in fiscal 2011 as compared to $5.9 million in fiscal 2010. As a percentage of total net sales, these expenses decreased from 0.3% in 2010 to 0.1% in 2011. The asset impairment charges in both years related primarily to Men's Wearhouse and Tux stores and K&G stores. Refer to Impairment of Long-Lived Assets as discussed in "Critical Accounting Polices and Estimates" below and Note 1 of Notes to Consolidated Financial Statements for further details.


Table of Contents

SG&A expenses increased to $861.5 million in fiscal 2011 from $790.9 million in fiscal 2010, an increase of $70.5 million or 8.9%. As a percentage of total net sales, these expenses decreased from 37.6% in fiscal 2010 to 36.2% in fiscal 2011. The components of this 1.4% net decrease in SG&A expenses as a percentage of total net sales and the related absolute dollar changes were as follows:

  %                                     Attributed to
  (0.8 )  Decrease in advertising expense as a percentage of total net sales from
          4.3% in fiscal 2010 to 3.5% in fiscal 2011. On an absolute dollar basis,
          advertising expense decreased $7.1 million.
  (0.9 )  Decrease in store salaries as a percentage of total net sales from 14.0%
          in fiscal 2010 to 13.1% in fiscal 2011. Store salaries on an absolute
          dollar basis increased $17.6 million primarily due to increased
          commissions associated with increased sales and increased store sales
          support salaries.
   0.3    Increase in other SG&A expenses as a percentage of total net sales from
          19.3% in fiscal 2010 to 19.6% in fiscal 2011. On an absolute dollar
          basis, other SG&A expenses increased $60.0 million primarily due to our
          UK corporate apparel operations acquired on August 6, 2010, increased
          non-store payroll and payroll-related costs and increased expenses
          associated with increased sales, offset by a decrease in costs incurred
          for ceased tuxedo rental distribution operations in fiscal 2011 compared

to fiscal 2010 (refer to Note 15 of Notes to Consolidated Financial Statements).

(1.4 )% Total

. . .

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