The Men's Wearhouse Management Discusses Q1 2012 Results - Earnings Call Transcript

The Men's Wearhouse (MW)

Q1 2012 Earnings Call

June 06, 2012 5:00 pm ET

Executives

Ken Dennard - Founder and Managing Partner

Neill P. Davis - Chief Financial Officer, Executive Vice President and Treasurer

Douglas S. Ewert - Chief Executive officer, President and Director

George A. Zimmer - Co-Founder and Executive Chairman

Analysts

Janet Kloppenburg

Margaret B. Whitfield - Sterne Agee & Leach Inc., Research Division

Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division

John D. Kernan - Cowen and Company, LLC, Research Division

Ike Boruchow - JP Morgan Chase & Co, Research Division

David M. Mann - Johnson Rice & Company, L.L.C., Research Division

Betty Y. Chen - Wedbush Securities Inc., Research Division

Bruce M. Zessar - Advisory Research Holdings, Inc.

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to The Men's Wearhouse First Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Wednesday, June 6, 2012.

And I would now like to turn the conference over to Ken Dennard of DRG&L. Please go ahead.

Ken Dennard

Thanks. Good afternoon, and welcome to The Men's Wearhouse first quarter of fiscal 2012 earnings call. Today's call with management will cover a review of the fiscal first quarter results, guidance for the second quarter and an updated outlook for the full year of 2012, followed by a Q&A session.

Please note, we'll be making a number of forward-looking statements today, and all such statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions mentioned today due to a variety of factors that affect the company, including the risks specified in the most recently filed Form 10-K. This call is copyrighted material of The Men's Wearhouse and cannot be rebroadcast without our express written consent.

I would now like to turn the call over to Neill Davis, Executive Vice President and Chief Financial Officer. Neill?

Neill P. Davis

Hello, everyone, and thanks for joining our call today. I will begin the discussion with a review of the financial highlights from the first quarter, as well as our updated outlook for the fiscal year. Doug will follow with his thoughts, including more detailed insights surrounding our past and forecasted results.

Total sales increased 1.1% in the quarter, which was in contrast to our plan for a 2% to 2.5% increase. This under-planned result was driven by lower sales within our retail segment, specifically related to our K&G stores.

Retail comp sales growth rates at our flagship brand, The Men's Wearhouse, were muted by less than planned tuxedo rental comps. The strength in retail sales is being influenced by strong gains in our modern fit merchandise categories, while the lower tuxedo rental growth rate is related to an overestimation on our part of the effects stemming from the Easter holiday calendar shift. However, our tuxedo rental results through the first 4 months of the year, which captures the effects of that shift, are on plan. We estimate the drag to the first quarter and likewise benefit to the second quarter as a result of that calendar shift to be approximately $0.02.

Our K&G stores experienced a comp sales decline against a planned modest increase. Although transaction counts per store increased in the quarter, the lower average tickets did not drive sufficient volume to achieve the planned comps.

At Moores, our Canadian group of retail stores, a higher average ticket was the driver to an in-line planned comp sales result for the quarter.

Our corporate apparel segment sales declined 16.4%, which was generally in line with expectations. As we have discussed previously, the timing of the rollout of customer new uniform programs this year versus last is the principal driver to this quarterly year-over-year decline. This timing variance is expected to have a reverse and positive effect in the second half of the year.

Our modest total top line growth in sales for the quarter was supported by gross margin expansion, up 82 basis points year-over-year and modestly below our plan of 90 to 100 basis points. The year-over-year improvement was driven by gains in retail product margins and occupancy leverage. The under-planned performance was related to lower occupancy leverage stemming from the under-planned top line growth rates.

SG&A expenses increased 5.3% over prior year's adjusted SG&A, representing a deleverage of 147 basis points year-over-year. This is a lower expense growth rate than planned, yet a similar level of deleverage. This increased spending is driven by increased investments in marketing and payroll to support e-commerce and technology development, as well as expenses related to sales growth in existing and new stores.

Total inventories rose 16.4% year-over-year. There are a couple of drivers to this pace of growth. First, to replenish comparatively oversold levels in the prior year as we embarked on a more aggressive promotional cadence; and second, to more aggressively pursue the modern fit fashion trends and big and tall size ranges. We continue to expect that year-ending inventory levels will be up in line with related top line growth rates for the year.

Regarding our financial outlook, we are reaffirming our fiscal year '12 earnings per share guidance of $2.70 to $2.78. Although we are lowering our expectations for K&G, we are planning offsetting increases from additional investments in our television marketing campaign in support of the modern fit fashion trend and from other focused merchandise program changes at our Men's Wearhouse stores that we expect to be additive to previous estimates.

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