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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 31, 1998 or
---------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to__________
Commission file number 0-20036
THE MEN'S WEARHOUSE, INC.
(Exact Name of Registrant as Specified in its Charter)
TEXAS 74-1790172
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
5803 GLENMONT DRIVE
HOUSTON, TEXAS 77081-1701
(Address of Principal Executive Offices) (Zip Code)
(713) 592-7200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]. No [ ].
The number of shares of Common Stock, par value $.01 per share, of the
Registrant outstanding at December 11, 1998 was 34,914,368.
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<TABLE>
<CAPTION>
REPORT INDEX
PART AND ITEM NO. PAGE NO.
- ---------------- --------
PART I - Financial Information
<S> <C>
Item 1 - Financial Statements
General Information...................................................................... 1
Consolidated Balance Sheets as of November 1, 1997 (unaudited), October 31, 1998
(unaudited) and January 31, 1998........................................................ 2
Consolidated Statements of Earnings for the Three and Nine Months Ended November 1, 1997
(unaudited) and October 31, 1998 (unaudited)............................................. 3
Consolidated Statements of Cash Flows for the Nine Months Ended November 1, 1997
(unaudited) and October 31, 1998 (unaudited).......................................... 4
Notes to Consolidated Financial Statements............................................... 5
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................................... 7
PART II - Other Information
Item 6 - Exhibits and Reports on Form 8-K................................................ 13
</TABLE>
<PAGE> 3
PART I, FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
GENERAL INFORMATION
The Consolidated Financial Statements herein have been prepared by the
Company without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission (the "SEC"). As applicable under such regulations,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The Company believes that the presentation and
disclosures herein are adequate to make the information not misleading, and the
financial statements reflect all elimination entries and normal adjustments
which are necessary for a fair statement of the results for the three and nine
months ended November 1, 1997 and October 31, 1998.
Operating results for interim periods are not necessarily indicative of
the results for full years. It is suggested that these consolidated financial
statements be read in conjunction with the consolidated financial statements for
the year ended January 31, 1998 and the related notes thereto included in the
Company's 1997 Annual Report on Form 10-K filed with the SEC.
1
<PAGE> 4
THE MEN'S WEARHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
November 1, October 31, January 31,
1997 1998 1998
----------- ----------- -----------
(Unaudited) (Unaudited) (Audited)
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 22,718 $ 5,910 $ 59,883
Inventories 235,140 275,215 203,390
Other current assets 10,793 13,596 14,297
--------- --------- ---------
Total current assets 268,651 294,721 277,570
--------- --------- ---------
PROPERTY AND EQUIPMENT, NET 79,120 96,434 81,266
OTHER ASSETS, NET 18,905 24,683 20,579
--------- --------- ---------
Total assets $ 366,676 $ 415,838 $ 379,415
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 70,304 $ 74,902 $ 51,817
Accrued expenses 22,230 21,152 33,408
Income taxes payable 3,430 837 9,765
Other current liabilities 95 -- 19
--------- --------- ---------
Total current liabilities 96,059 96,891 95,009
--------- --------- ---------
LONG-TERM DEBT 57,500 32,750 57,500
OTHER LIABILITIES 7,272 7,089 6,858
SHAREHOLDERS' EQUITY:
Common Stock 221 348 221
Capital in excess of par 109,710 148,264 109,969
Retained earnings 96,255 131,490 110,199
--------- --------- ---------
206,186 280,102 220,389
Less:
Treasury stock, at cost (341) (994) (341)
--------- --------- ---------
Total shareholders' equity 205,845 279,108 220,048
--------- --------- ---------
Total liabilities and shareholders' equity $ 366,676 $ 415,838 $ 379,415
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE> 5
THE MEN'S WEARHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
--------------------------- --------------------------
November 1, October 31, November 1, October 31,
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $146,311 $170,742 $410,867 $504,450
Cost of goods sold, including buying and
occupancy costs 91,172 105,461 256,104 311,432
-------- -------- -------- --------
Gross margin 55,139 65,281 154,763 193,018
Selling, general and administrative expenses 45,063 52,321 127,508 153,910
-------- -------- -------- --------
Operating income 10,076 12,960 27,255 39,108
Interest expense, net 598 603 1,824 1,674
-------- -------- -------- --------
Earnings before income taxes 9,478 12,357 25,431 37,434
Provision for income taxes 3,909 5,097 10,490 15,442
-------- -------- -------- --------
Earnings before extraordinary item 5,569 7,260 14,941 21,992
Extraordinary item, net of tax -- 701 -- 701
-------- -------- -------- --------
Net earnings $ 5,569 $ 6,559 $ 14,941 $ 21,291
======== ======== ======== ========
Net earnings per basic share:
Earnings before extraordinary item $ 0.17 $ 0.21 $ 0.47 $ 0.66
Extraordinary item -- 0.02 -- 0.02
-------- -------- -------- --------
Net earnings $ 0.17 $ 0.19 $ 0.47 $ 0.64
======== ======== ======== ========
Net earnings per diluted share:
Earnings before extraordinary item $ 0.17 $ 0.21 $ 0.47 $ 0.64
Extraordinary item -- 0.02 -- 0.02
-------- -------- -------- --------
Net earnings $ 0.17 $ 0.19 $ 0.47 $ 0.62
======== ======== ======== ========
Weighted average shares outstanding:
Basic 33,077 34,149 32,089 33,517
======== ======== ======== ========
Diluted 36,200 35,826 35,123 36,261
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 6
THE MEN'S WEARHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
For the Nine Months Ended
--------------------------
November 1, October 31,
1997 1998
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings $ 14,941 $ 21,291
Adjustments to reconcile net earnings to
net cash used in operating activities:
Depreciation and amortization 12,342 15,393
Increase in inventories (71,000) (71,825)
(Increase) decrease in other assets (1,067) 701
Increase in accounts payable and accrued expenses 30,703 12,495
Decrease in income taxes payable (3,335) (8,272)
Increase (decrease) in other liabilities (110) 231
-------- --------
Net cash used in operating activities (17,526) (29,986)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (19,288) (29,066)
Investment in trademark, tradenames and other intangibles (3,348) (6,425)
-------- --------
Net cash used in investing activities (22,636) (35,491)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 29,961 --
Principal payments under capital lease obligations (347) (19)
Payments of deferred loan costs (230) --
Exercise of stock options 1,140 1,215
Option shares relinquished for tax obligations (1,757) (769)
Principal payments of long-term debt -- (20,747)
Bank borrowings -- 32,750
Purchase of shares for treasury -- (926)
-------- --------
Net cash provided by financing activities 28,767 11,504
-------- --------
DECREASE IN CASH (11,395) (53,973)
CASH, beginning of period 34,113 59,883
-------- --------
CASH, end of period $ 22,718 $ 5,910
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 7
THE MEN'S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Significant Accounting Policies--
The Consolidated Financial Statements include the accounts of The Men's
Wearhouse, Inc. and its subsidiaries (the "Company"). There have been no
significant changes in the accounting policies of the Company during the periods
presented. For a description of these policies, see Note 1 of Notes to
Consolidated Financial Statements in the Company's Annual Report on Form 10-K
for the year ended January 31, 1998.
2. Earnings per Share--
On June 19, 1998, the Company effected a three-for-two stock split by
paying a 50% stock dividend to stockholders of record as of June 12, 1998. All
share and per share information included in the accompanying consolidated
financial statements and related notes thereto have been restated to reflect the
stock split.
The following table reconciles the earnings and shares used in the
basic and diluted EPS computations (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
------------------------------ ------------------------------
NOVEMBER 1, OCTOBER 31, NOVEMBER 1, OCTOBER 31,
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Earnings before extraordinary item $ 5,569 $ 7,260 $14,941 $21,992
Extraordinary item, net of tax -- 701 -- 701
------- ------- ------- -------
Net earnings $ 5,569 $ 6,559 $14,941 $21,291
======= ======= ======= =======
Weighted average number of common
shares outstanding 33,077 34,149 32,089 33,517
======= ======= ======= =======
Basic EPS
Earnings before extraordinary item $ 0.17 $ 0.21 $ 0.47 $ 0.66
Extraordinary item -- 0.02 -- 0.02
------- ------- ------- -------
Net earnings $ 0.17 $ 0.19 $ 0.47 $ 0.64
======= ======= ======= =======
Earnings before extraordinary item $ 5,569 $ 7,260 $14,941 $21,992
Interest on notes, net of taxes 486 152 1,457 1,144
------- ------- ------- -------
As adjusted 6,055 7,412 16,398 23,136
Extraordinary item, net of tax -- 701 -- 701
------- ------- ------- -------
As adjusted $ 6,055 $ 6,711 $16,398 $22,435
======= ======= ======= =======
Weighted average number of common
shares outstanding 33,077 34,149 32,089 33,517
Assumed exercise of stock options 595 566 506 689
Assumed conversion of notes 2,528 1,111 2,528 2,055
------- ------- ------- -------
As adjusted 36,200 35,826 35,123 36,261
======= ======= ======= =======
Diluted EPS
Earnings before extraordinary item $ 0.17 $ 0.21 $ 0.47 $ 0.64
Extraordinary item -- 0.02 -- 0.02
------- ------- ------- -------
Net earnings $ 0.17 $ 0.19 $ 0.47 $ 0.62
======= ======= ======= =======
</TABLE>
5
<PAGE> 8
3. Supplemental Financial Information --
Supplemental Cash Flow information (in thousands):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
------------------------------------
NOVEMBER 1, OCTOBER 31,
1997 1998
---------------- ----------------
<S> <C> <C>
Cash paid during the period for:
Interest $ 3,151 $ 2,149
============= =============
Income taxes $ 13,825 $ 23,714
============= =============
Non-cash investing and financing activities:
Additional paid in capital, net of
unamortized deferred financing costs,
resulting from conversion of long-term
debt to common stock $ -- $ 35,909
============= =============
Additional paid in capital resulting from
tax benefit recognized upon exercise of
stock options $ 1,429 $ 656
============= =============
Treasury stock issued to employee stock
ownership plan $ 1,000 $ 1,666
============= =============
</TABLE>
4. Long-term Debt--
On August 14, 1998, the Company gave notice to the holders of its
outstanding 5 1/4 % Convertible Subordinated Notes (the "Notes") that the
Company would redeem the Notes on September 14, 1998. As a result, $36.8 million
principal amount of the Notes was converted into 1.6 million shares of Men's
Wearhouse common stock and $20.7 million principal amount was redeemed for an
aggregate of $21.5 million. An extraordinary charge of $0.7 million, net of $0.5
million tax benefit, was recognized for the early retirement of the debt.
5. Subsequent Event--
On November 18, 1998, the Company executed a definitive agreement to
acquire Moores Retail Group, Inc. ("Moores"), a privately held retail operation
which includes 115 men's apparel stores in Canada (107 stores) and the United
States (8 stores) and a vertically integrated manufacturing facility in
Montreal, Canada.
Under the terms of the agreement, Moores would be merged with a
subsidiary of The Men's Wearhouse, Inc. with shareholders and option holders of
Moores receiving, based on certain adjustments, between 2.5 and 2.75 million
shares of the Company's common stock for all of the outstanding shares of
Moores. In addition, the Company will assume approximately Can $90 million in
debt of Moores, which it expects to refinance. The Company anticipates
accounting for the transaction as a pooling of interests.
6
<PAGE> 9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
For supplemental information, it is suggested that "Management's
Discussion and Analysis of Financial Condition and Results of Operations" be
read in conjunction with the corresponding section included in the Company's
Annual Report on Form 10-K, as amended by Form 10-K/A, for the year ended
January 31, 1998. 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 "1998" mean the fiscal year
ending January 30, 1999.
In large part, changes in net sales and operating results are impacted
by the number of stores operating during the fiscal period. The following table
presents information with respect to stores in operation during each of the
respective fiscal periods.
<TABLE>
<CAPTION>
FISCAL YEAR
THREE MONTHS ENDED NINE MONTHS ENDED ENDED
------------------------------ ------------------------------- -------------
NOVEMBER 1, OCTOBER 31, NOVEMBER 1, OCTOBER 31, JANUARY 31,
1997 1998 1997 1998 1998
------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Stores open at beginning of period 374 414 345 396 345
Opened 10 12 36 30 50
Acquired -- -- 6 4 6
Closed (1) (12) (4) (16) (5)
----------- ----------- ----------- ----------- ----------
Stores open at end of period 383 414 383 414 396
=========== =========== =========== =========== ==========
</TABLE>
RESULTS OF OPERATIONS
Three Months Ended November 1, 1997 and October 31, 1998
The Company's net sales increased $24.4 million, or 16.7%, to $170.7
million for the quarter ended October 31, 1998 due primarily to sales resulting
from the increased number of stores and increased sales at existing stores.
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 5.8% from the same prior year quarter. The
comparable store sales increase for the third quarter of 1998 does not include
sales from stores acquired in fiscal 1998. These acquired stores accounted for
$3.9 million of the sales increase.
Gross margin increased to $65.3 million in the third quarter of 1998
which was an 18.4% increase from the same prior year quarter. As a percentage of
sales, gross margin increased from 37.7% in the third quarter of 1997 to 38.2%
in the third quarter of 1998. This increase in gross margin predominantly
resulted from a decrease in product and occupancy costs, offset slightly by
higher alteration costs as a percentage of sales in traditional Men's Wearhouse
stores. These gross margin improvements were offset, in part, by the lower
product margin realized at the Value Priced Clothing ("VPC") division, which by
design operates at a lower gross margin than the traditional Men's Wearhouse
stores.
Selling, general and administrative ("SG&A") expenses decreased as a
percentage of sales from 30.8% for the quarter ended November 1, 1997 to 30.6%
for the quarter ended October 31, 1998, while such expenses increased by $7.3
million to $52.3 million. On an absolute dollar basis, the principal components
of SG&A expenses increased primarily due to the Company's growth. The decrease
in SG&A expenses as a percentage of sales was related primarily to the impact of
traditional store comparable sales increases and the operations of VPC stores,
which have lower operating costs than traditional stores. Advertising expense
decreased from 5.6% to 5.5% of net sales, store salaries decreased from 12.6% to
12.4% of net sales and other SG&A expenses increased from 12.6% to 12.7% of net
sales.
7
<PAGE> 10
Interest expense, net of interest income, remained constant at $0.6
million in the third quarters of 1997 and 1998. Weighted average borrowings
outstanding decreased $13.9 million from the prior year to $43.7 million in the
third quarter of 1998, and the weighted average interest rate on outstanding
indebtedness increased from 6.30% to 6.72%. The change in the weighted average
borrowings and interest rate resulted from the early retirement of the Company's
5 1/4% Convertible Subordinated Debentures, partially offset by higher interest
rate borrowings under the Company's revolving credit facility, in the third
quarter of 1998. Interest expense was offset by interest income of $0.3 million
for the third quarter of 1997 and $29,000 for the third quarter of 1998
resulting from the investment of excess cash.
The Company's effective income tax rate for the quarter ended October
31, 1998 was 41.2% which was unchanged from the same prior year quarter. The
effective tax rate was higher than the statutory federal rate of 35% primarily
due to the effect of state income taxes and the nondeductibility of a portion of
meal and entertainment expenses.
The extraordinary charge of $0.7 million, net of a $0.5 million tax
benefit, resulted from the early retirement of the Company's 5 1/4% Convertible
Subordinated Debentures as discussed in "Liquidity and Capital Resources."
Nine Months Ended November 1, 1997 and October 31, 1998
The Company's net sales increased $93.6 million, or 22.8%, to $504.5
million for the nine months ended October 31, 1998 due primarily to sales
resulting from the increased number of stores and increased sales at existing
stores. Comparable store sales increased 11.0% from the same prior year period.
The comparable store sales increase for the first nine months of 1998 does not
include sales from stores acquired in fiscal 1998. These acquired stores
accounted for $ 11.5 million of the sales increase.
Gross margin increased to $193.0 million in the first three quarters of
1998 which was a 24.7% increase from the same prior year period. As a percentage
of sales, gross margin increased from 37.7% in the first nine months of 1997 to
38.3% in the first nine months of 1998. This increase in gross margin
predominantly resulted from a decrease in product, occupancy and alteration
costs as a percentage of sales in traditional Men's Wearhouse stores. The gross
margin improvement was offset, in part, by the lower product margin realized at
VPC, which by design operates at a lower gross margin than the traditional Men's
Wearhouse stores.
Selling, general and administrative expenses decreased as a percentage
of sales from 31.0% for the nine months ended November 1, 1997 to 30.5% for the
nine months ended October 31, 1998, while such expenses increased by $26.4
million to $153.9 million. On an absolute dollar basis, the principal components
of SG&A expenses increased primarily due to the Company's growth. The decrease
in SG&A expenses as a percentage of sales was related primarily to the impact of
traditional store comparable sales increases and the operations of VPC stores,
which have lower operating costs than traditional stores. Advertising expense
decreased from 6.2% to 5.9% of net sales, store salaries decreased from 12.5% to
12.1% of net sales and other SG&A expenses increased from 12.3% to 12.5% of net
sales.
Interest expense, net of interest income, decreased from $1.8 million
in the first nine months of 1997 to $1.7 million in the first nine months of
1998. Weighted average borrowings outstanding decreased $4.5 million from the
prior year to $53.2 million in the first three quarters of 1998, while the
weighted average interest rate on outstanding indebtedness increased from 6.24%
to 6.46%. The change in the weighted average borrowings and interest rate
resulted from the early retirement of the Company's 5 1/4% Convertible
Subordinated Debentures, partially offset by higher interest rate borrowings
under the Company's revolving credit facility, in the third quarter of 1998.
Interest expense was offset by interest income of $0.9 million for the first
nine months of 1997 and $0.8 million for the first nine months of 1998 resulting
from the investment of excess cash.
The Company's effective income tax rate for the nine months ended
November 1, 1997 was 41.2% which was slightly lower than the rate of 41.3% for
the nine months ended October 31, 1998. The effective tax rate was higher than
the statutory federal rate of 35% primarily due to the effect of state income
taxes and the nondeductibility of a portion of meal and entertainment expenses.
8
<PAGE> 11
The extraordinary charge of $0.7 million, net of a $0.5 million tax
benefit, resulted from the early retirement of the Company's 5 1/4% Convertible
Subordinated Debentures as discussed in "Liquidity and Capital Resources."
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $17.5 million in the first
nine months of 1997 and $30.0 million in the first nine months of 1998. These
amounts primarily represent net earnings plus depreciation and amortization and
increases in payables, offset by increases in inventories. Inventories increased
$71.0 million and $71.8 million for the nine months ended November 1, 1997 and
October 31, 1998, respectively. The inventory increases primarily relate to
seasonal inventory buildup and the addition of inventory for new and/or acquired
stores and stores expected to be opened in the following quarter.
Working capital was $197.8 million at October 31, 1998, which is an
increase from $182.6 million at January 31, 1998 and up from $172.6 million at
November 1, 1997. Historically, the Company's working capital has been at its
lowest level in January and February, and has increased through November as
inventory buildup is financed with both short-term and long-term borrowings in
preparation for the fourth quarter selling season. The change in working capital
from January 31, 1998 to October 31, 1998 is principally related to the
aforementioned seasonal inventory increase.
Cash used in investing activities was $22.6 million and $35.5 million
in the first nine months of 1997 and 1998, respectively. For the nine months
ended October 31, 1998, cash used in investing activities was primarily
comprised of capital expenditures related to the enterprise-wide project to
upgrade the Company's information technology infrastructure, new stores opened
during the year or under construction at the end of the first three quarters and
the construction of the new distribution center opened in June 1998. In
addition, $6.4 million of cash was used in the first nine months of 1998
primarily to purchase trademarks and other intangible assets associated with
acquisitions.
In July 1997, the Company issued 1,000,000 shares of Common Stock for
net proceeds of $30.0 million. The Company used the proceeds from such offering
to fund its continued expansion and upgrade its information technology
infrastructure. The remaining cash was invested in short-term securities.
In August 1998, the Company gave notice to the holders of its
outstanding 5 1/4% Convertible Subordinated Debentures (the "Notes") that the
Company would exercise its provisional call rights to redeem the Notes on
September 14, 1998. Holders were given the option to convert the $57.5 million
in Notes into shares of the Company's common stock at a price of $22.75 per
share on or before September 10, 1998 or to have their Notes redeemed at a
redemption price of $1,035 per $1,000 principal amount of Notes. Approximately
$36.8 million of the principal amount of the Notes was converted to
approximately 1.6 million shares of the Company's common stock and approximately
$20.7 million principal amount was redeemed.
In June 1997, the Company entered into a new revolving credit agreement
with its bank group (the "Credit Agreement") which replaced a previously
existing credit facility. The Credit Agreement provides for borrowing of up to
$125 million through April 30, 2002. As of October 31, 1998, $32.8 million was
outstanding under the Credit Agreement.
Advances under the Credit Agreement bear interest at a rate per annum
equal to, at the Company's option, (i) the agent's prime rate or (ii) the
reserve adjusted LIBOR rate plus an interest rate margin varying between .875%
to 1.375%. The Credit Agreement provides for fees applicable to unused
commitments of .125% to .275%. The interest rate for borrowings under the Credit
Agreement was 6.7% at October 31, 1998.
The Credit Agreement contains certain restrictive and financial
covenants, including the requirement to maintain a minimum amount of
Consolidated Net Worth (as defined). The Company is also required to maintain
certain debt to cash flow, cash flow coverage and current ratios and must keep
its average store inventories below certain specified amounts. In addition, the
Credit Agreement limits additional indebtedness, creation of liens, Restrictive
Payments (as defined) and Investments (as defined). The Credit Agreement also
prohibits payment of cash dividends on the Common Stock of the Company. The
Credit Agreement permits, with certain limitations, the Company to merge or
consolidate with another company, sell or dispose of its property and make
acquisitions. The Company is in compliance with the covenants in the Credit
Agreement.
9
<PAGE> 12
On November 18, 1998, the Company executed a definitive agreement to
acquire Moores Retail Group, Inc. ("Moores"), a privately held retail operation
which includes 115 men's apparel stores in Canada (107 stores) and the United
States (8 stores) and a vertically integrated manufacturing facility in
Montreal, Canada. Under the terms of the agreement, Moores would be merged with
a subsidiary of The Men's Wearhouse, Inc. with shareholders and option holders
of Moores receiving, based on certain adjustments, between 2.5 and 2.75 million
shares of the Company's Common Stock for all of the outstanding shares of
Moores. In addition, the Company will assume approximately Can $90 million in
debt of Moores, which it expects to refinance. The Company anticipates
accounting for the transaction as a pooling of interests.
The Company expects to amend and restate the existing Credit Agreement
concurrently with the closing of the Moores acquisition. Covenants and interest
rates are expected to be substantially similar to those contained in the
Company's existing Credit Agreement.
The Company anticipates that its existing cash and cash flow from
operations, supplemented by borrowings under the Credit Agreement, will be
sufficient to fund its planned store openings, other capital expenditures and
operating cash requirements for at least the next 12 months as well as the
refinancing of the Moores debt.
In connection with the Company's direct sourcing program, the Company
may enter into purchase commitments that are denominated in a foreign currency.
The Company generally enters into forward exchange contracts to reduce the risk
of currency fluctuations related to such commitments. The majority of the
forward exchange contracts are with one financial institution. Therefore, the
Company is exposed to credit risk in the event of nonperformance by this party.
However, due to the creditworthiness of this major financial institution, full
performance is anticipated. The Company may also be exposed to market risk as a
result of changes in foreign exchange rates. This market risk should be
substantially offset by changes in the valuation of the underlying transactions
being hedged.
YEAR 2000
The Company has aggressively pursued the implementation of technology
which provides the opportunity for competitive advantage and which leverages
human resources. By implementing a sophisticated management information system,
and by integrating it with a highly functional telecommunications system, the
Company has effectively managed the operation of its business and its inventory
while experiencing substantial growth.
The Company's inventory control systems, including purchase order
management, automatic replenishment of basic items, and real-time point of sale,
have contributed to enhanced performance and profitability and to achieving
inventory shrinkage rates that are consistently below industry averages. The use
of Electronic Data Interchange with several suppliers combined with the use of
data warehousing and decision support technologies have substantially leveraged
the efforts of the merchandising team, allowing them to reallocate time from
simple and repetitive tasks to those requiring more analytical skills.
The Company's voice mail system has not only enhanced internal
communication capabilities, it also has provided an actively used channel for
improving customer service and it has contributed to the Company's advertising
efforts, giving the Company access to unsolicited customer testimonials.
Due to the dramatic changes in state of the art information technology,
both in general and with regard to the retail industry, in mid-1997, the Company
commenced an enterprise-wide project to upgrade its information technology by
acquiring products that are generally available and field tested and are
designed to increase the efficiency and the future productivity of its
operations. The Company has benefited significantly from investment in
technology in the past, and it is anticipated that these modifications will
further increase the benefit that the Company derives from technology, both in
the near term and in the future. In completing these modifications, the Company
expects to achieve Year 2000 date conversion compliance. Capital expenditures
related to the project are anticipated to be between approximately $12.0 million
and $20.0 million. The amount of expenditures related specifically to year 2000
date conversion compliance are not separable from this amount. The Company
expects that all of its business systems will be Year 2000 compliant by
mid-1999. The Company does not anticipate that the cost will have a material
effect on the Company's consolidated financial position or results of operations
for any given year. However, no assurances can be given that the Company will be
able to completely identify or
10
<PAGE> 13
address all Year 2000 compliance issues, or that third parities with whom the
Company does business with will not experience system failures as a result of
the Year 2000 issue, nor can the Company fully predict the consequences of
noncompliance.
The Company employs technology in several other areas of its operations
and intends to continue its pursuit of technologies that will favorably impact
performance and/or the delivery of customer service.
As part of its assessment of the Year 2000 issue, the Company has
completed an inventory of its hardware and software systems, including the
embedded systems in the Company's buildings, property and equipment. The Company
is presently in the process of implementing converted and replacement systems
for all of its non-compliant hardware and software systems to ensure that the
operation of such systems will not be materially adversely affected by the Year
2000 date change. The Company estimates that its efforts to make all internal
systems Year 2000 compliant are approximately 70% complete.
To date, the Company has made expenditures of approximately $500,000
related to its telephone and security systems specifically to address the Year
2000 issue. The Company does not anticipate that it will incur additional
material expenditures beyond those associated with the updating and upgrading of
the information systems discussed above to address the Year 2000 issue.
In many cases, the Company has received written responses from its
vendors and suppliers confirming that the vendor or supplier is Year 2000
compliant. The Company will continue to monitor those vendors and suppliers, as
well as those who have not provided written assurance.
Assuming no general failure of utilities to provide basic services over
large geographic areas or of the banking systems generally to conduct business
substantially as usual, or of the credit card systems to confirm credit
generally, the Company believes that at the store level, the worst case scenario
for the Company would require the processing of credit approval by telephone and
the ordering and allocation of inventory by telephone. While each of those
scenarios would increase the cost of doing business and may result in the loss
of some sales, the Company does not believe that either of these situations
would have a material adverse effect on the Company's results of operations.
If the Company is unable to purchase or receive inventory, or is unable
to arrange for the manufacture of piece goods acquired by the Company into
tailored clothing, such failure, depending upon how extensive, could have a
material adverse effect on the operations of the Company. However, no vendor or
supplier accounts for more than 10% of the inventory purchased by the Company
and, in most cases, alternative suppliers are available.
The Company does anticipate that it will increase its inventory for
approximately one month prior to the Year 2000 to insure that it has adequate
inventory to cover possible disruptions associated with the Year 2000 date
change.
The Company has not yet developed a contingency plan at present.
However, the Company will adopt such a plan, if necessary, in mid-1999 to
address any unresolved issues or risks that may exist at that time.
The statements included in this section are intended to be and are
designated "Year 2000 Readiness Disclosure" statements within the meaning of the
Year 2000 Information and Readiness Disclosure Act.
FORWARD-LOOKING STATEMENTS
Certain statements made herein and in other public filings and releases
by the Company contain "forward-looking" information (as defined in the Private
Securities Litigation Reform Act of 1995) that involve risk and uncertainty.
These forward-looking statements may include, but are not limited to, future
sales, earnings, margins, costs, number and costs of store openings, demand for
men's clothing, market trends in the retail men's 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, this Management's Discussion and Analysis of
Financial Condition and Results of Operations section and other sections of the
Company's filings with the Securities and Exchange Commission under the
Securities Exchange Act of 1934 and the Securities Act of 1933.
11
<PAGE> 14
Actual results and trends in the future may differ materially depending
on a variety of factors including, but not limited to, domestic economic
activity and inflation, the Company's successful execution of internal operating
plans and new store and new market expansion plans, performance issues with key
suppliers, foreign currency fluctuations, government export and import policies
and legal proceedings. Future results will also be dependent upon the ability of
the Company to continue to identify and complete successful expansions and
penetrations into existing and new markets and its ability to integrate such
expansions with the Company's existing operations.
12
<PAGE> 15
PART II, OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
EXHIBIT
NUMBER EXHIBIT INDEX
------- -------------
27.1 -- Financial Data Schedule (Filed herewith).
(b) Reports on Form 8-K.
None.
13
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant, The Men's Wearhouse, Inc., has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
THE MEN'S WEARHOUSE, INC.
Dated: December 15, 1998
By /s/ DAVID H. EDWAB
-----------------------------------
David H. Edwab
President
By /s/ GARY G. CKODRE
-----------------------------------
Gary G. Ckodre
Vice President - Finance and Principal
Financial and Accounting Officer
14
<PAGE> 17
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT INDEX
------- -------------
27.1 -- Financial Data Schedule (Filed herewith).
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 5,910
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 275,215
<CURRENT-ASSETS> 294,721
<PP&E> 161,469
<DEPRECIATION> 65,035
<TOTAL-ASSETS> 415,838
<CURRENT-LIABILITIES> 96,891
<BONDS> 32,750
0
0
<COMMON> 348
<OTHER-SE> 278,760
<TOTAL-LIABILITY-AND-EQUITY> 415,838
<SALES> 504,450
<TOTAL-REVENUES> 504,450
<CGS> 311,432
<TOTAL-COSTS> 311,432
<OTHER-EXPENSES> 153,910
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,674
<INCOME-PRETAX> 37,434
<INCOME-TAX> 15,442
<INCOME-CONTINUING> 21,992
<DISCONTINUED> 0
<EXTRAORDINARY> 701
<CHANGES> 0
<NET-INCOME> 21,291
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0.62
</TABLE>
