<PAGE> 1
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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 30, 1999 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)
<TABLE>
<S> <C>
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)
</TABLE>
(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 of the Registrant outstanding, par
value $.01 per share, outstanding at December 10, 1999 was 40,761,704. In
addition, there were 1,154,353 Exchangeable Shares outstanding at December 10,
1999.
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<PAGE> 2
REPORT INDEX
<TABLE>
<CAPTION>
<S> <C>
PART AND ITEM NO. PAGE NO.
- ----------------- --------
PART I - Financial Information
Item 1 - Financial Statements
General Information...................................................................... 1
Consolidated Balance Sheets as of October 31, 1998 (unaudited), October 30, 1999
(unaudited) and January 30, 1999....................................................... 2
Consolidated Statements of Earnings for the Three and Nine Months Ended October 31,
1998 (unaudited) and October 30, 1999 (unaudited)...................................... 3
Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 1998
(unaudited) and October 30, 1999 (unaudited)........................................... 4
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................................... 8
Item 3 - Qualitative and Quantitative Disclosures about Market Risk...................... 13
PART II - Other Information
Item 6 - Exhibits and Reports on Form 8-K................................................ 14
</TABLE>
<PAGE> 3
PART I, FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
GENERAL INFORMATION
The consolidated financial statements herein include the accounts of The
Men's Wearhouse, Inc. and its subsidiaries ("the Company") and have been
prepared without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission (the "SEC"). As applicable under such regulations,
certain information and footnote disclosures have been condensed or omitted. 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 October 31, 1998
and October 30, 1999.
The Company combined with Moores Retail Group Inc. ("Moores") on February
10, 1999 and with K&G Men's Center, Inc. ("K&G") on June 1, 1999 in transactions
accounted for as poolings of interests. Both Moores and K&G are included in
references to the Company. In accordance with the pooling of interest method of
accounting permitted by Accounting Principles Board Opinion No. 16 "Business
Combinations", all prior period consolidated financial statements presented have
been restated to include the accounts of Moores and K&G. In addition, the
combined financial results presented include reclassifications to conform the
accounting policies of Moores and K&G to those of the Company.
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 30, 1999 and the related notes thereto included in the
Company's 1998 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>
October 31, October 30, January 30,
1998 1999 1999
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,795 $ 14,779 $ 31,012
Inventories 348,408 368,087 302,717
Other current assets 30,162 23,520 25,903
--------- --------- ---------
Total current assets 392,365 406,386 359,632
PROPERTY AND EQUIPMENT, NET 112,071 129,910 123,771
OTHER ASSETS 50,236 48,804 51,673
--------- --------- ---------
Total assets $ 554,672 $ 585,100 $ 535,076
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 101,067 $ 95,967 $ 71,034
Accrued expenses 24,200 39,560 37,592
Revolver and current portion of long-term debt 13,908 2,549 11,212
Income taxes payable 1,858 1,417 9,170
--------- --------- ---------
Total current liabilities 141,033 139,493 129,008
LONG-TERM DEBT 77,627 57,272 44,870
OTHER LIABILITIES 7,668 9,200 9,743
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock -- -- --
Common stock 392 397 393
Capital in excess of par 177,961 183,480 178,144
Retained earnings 151,348 196,708 174,146
Currency translation adjustment (363) (102) (233)
--------- --------- ---------
329,338 380,483 352,450
Less:
Treasury stock, at cost (994) (1,348) (995)
--------- --------- ---------
Total shareholders' equity 328,344 379,135 351,455
--------- --------- ---------
Total liabilities and shareholders' equity $ 554,672 $ 585,100 $ 535,076
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE> 5
THE MEN'S WEARHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
------------------------------- -------------------------------
October 31, October 30, October 31, October 30,
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 234,273 $ 272,836 $ 690,683 $ 788,268
Cost of goods sold, including buying and
occupancy costs 150,622 173,243 443,496 503,945
--------- --------- --------- ---------
Gross margin 83,651 99,593 247,187 284,323
Selling, general and administrative expenses 66,047 76,755 193,155 220,065
Transaction costs -- -- -- 7,707
Duplicative store closing costs -- -- -- 6,070
Merger related litigation costs -- -- -- 930
--------- --------- --------- ---------
Operating income 17,604 22,838 54,032 49,551
Interest expense, net 2,166 919 6,197 2,178
--------- --------- --------- ---------
Earnings before income taxes 15,438 21,919 47,835 47,373
Provision for income taxes 6,610 8,947 20,492 21,899
--------- --------- --------- ---------
Earnings before extraordinary item 8,828 12,972 27,343 25,474
Extraordinary item, net of tax 701 -- 701 2,912
--------- --------- --------- ---------
Net earnings $ 8,127 $ 12,972 $ 26,642 $ 22,562
========= ========= ========= =========
Net earnings per basic share:
Earnings before extraordinary item $ 0.22 $ 0.31 $ 0.68 $ 0.61
Extraordinary item (0.02) -- (0.02) (0.07)
--------- --------- --------- ---------
Net earnings $ 0.20 $ 0.31 $ 0.66 $ 0.54
========= ========= ========= =========
Net earnings per diluted share:
Earnings before extraordinary item $ 0.21 $ 0.31 $ 0.66 $ 0.60
Extraordinary item (0.02) -- (0.02) (0.07)
--------- --------- --------- ---------
Net earnings $ 0.19 $ 0.31 $ 0.64 $ 0.53
========= ========= ========= =========
Weighted average shares outstanding:
Basic 41,057 41,848 40,399 41,841
========= ========= ========= =========
Diluted 42,745 42,277 43,143 42,441
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 6
THE MEN'S WEARHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended
-------------------------------
October 31, October 30,
1998 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 26,642 $ 22,562
Adjustments to reconcile net earnings to
net cash provided by (used in) operating activities:
Extraordinary item, net of tax 701 2,912
Depreciation and amortization 19,202 21,985
Stock option compensation expense -- 889
Loss on disposal of property and equipment -- 3,417
Increase in inventories (93,094) (64,496)
Increase in other assets (181) (1,685)
Increase in accounts payable and accrued expenses 22,155 30,199
Decrease in income taxes payable (8,677) (6,225)
Decrease in other liabilities (331) (768)
-------- --------
Net cash provided by (used in) operating activities (33,583) 8,790
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (35,473) (28,918)
Investment in trademark, tradenames and other intangibles (6,436) (356)
Sale of marketable securities 25,533 8,525
Purchase of marketable securities (18,045) (2,500)
Purchase of minority interests -- (2,135)
-------- --------
Net cash used in investing activities (34,421) (25,384)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank borrowings 40,504 65,046
Principal payments on bank debt (23,005) (64,179)
Distribution to minority investors (176) --
Payment of deferred loan costs (256) (623)
Proceeds from issuance of common stock 3,041 1,671
Tax payments related to options exercised (769) (304)
Purchase of treasury stock (926) (1,273)
-------- --------
Net cash provided by financing activities 18,413 338
-------- --------
Effect of exchange rate changes on cash and cash equivalents (182) 23
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (49,773) (16,233)
CASH AND CASH EQUIVALENTS, beginning of period 63,568 31,012
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 13,795 $ 14,779
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 7
THE MEN'S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 30, 1999.
2. EARNINGS PER SHARE--
Basic earnings per share ("EPS") is computed using the weighted average
number of common shares outstanding during the period and net earnings. Diluted
EPS gives effect to the potential dilution which would have occurred if
additional shares were issued for stock options exercised under the treasury
stock method and, in fiscal 1998, conversion of the convertible debt ("Notes"),
with fiscal 1998 net earnings adjusted for interest expense associated with the
Notes. 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
--------------------------- ---------------------------
OCTOBER 31, OCTOBER 30, OCTOBER 31, OCTOBER 30,
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic EPS
Earnings before extraordinary item $ 8,828 $ 12,972 $ 27,343 $ 25,474
Extraordinary item, net of tax 701 -- 701 2,912
-------- -------- -------- --------
Net earnings $ 8,127 $ 12,972 $ 26,642 $ 22,562
======== ======== ======== ========
Weighted average number of common shares outstanding 41,057 41,848 40,399 41,841
======== ======== ======== ========
Basic EPS:
Earnings before extraordinary item $ 0.22 $ 0.31 $ 0.68 $ 0.61
Extraordinary item, net of tax (0.02) -- (0.02) (0.07)
-------- -------- -------- --------
Net earnings $ 0.20 $ 0.31 $ 0.66 $ 0.54
======== ======== ======== ========
Diluted EPS
Earnings before extraordinary item $ 8,828 $ 12,972 $ 27,343 $ 25,474
Interest on Notes, net of taxes 152 -- 1,144 --
-------- -------- -------- --------
As adjusted earnings before extraordinary items 8,980 12,972 28,487 25,474
Extraordinary item, net of tax 701 -- 701 2,912
-------- -------- -------- --------
As adjusted net earnings $ 8,279 $ 12,972 $ 27,786 $ 22,562
======== ======== ======== ========
Weighted average number of common shares outstanding 41,057 41,848 40,399 41,841
Assumed exercise of stock options 577 429 689 600
Assumed conversion of Notes 1,111 -- 2,055 --
-------- -------- -------- --------
As adjusted shares 42,745 42,277 43,143 42,441
======== ======== ======== ========
Diluted EPS:
Earnings before extraordinary item $ 0.21 $ 0.31 $ 0.66 $ 0.60
Extraordinary item, net of tax (0.02) -- (0.02) (0.07)
-------- -------- -------- --------
Net earnings $ 0.19 $ 0.31 $ 0.64 $ 0.53
======== ======== ======== ========
</TABLE>
5
<PAGE> 8
3. COMPREHENSIVE INCOME AND SUPPLEMENTAL CASH FLOWS--
The Company's comprehensive income, which encompasses net earnings and
currency translation adjustments, is as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
--------------------------- ---------------------------
OCTOBER 31, OCTOBER 30, OCTOBER 31, OCTOBER 30,
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net earnings $ 8,127 $ 12,972 $ 26,642 $ 22,562
Currency translation adjustments, net of tax (104) 91 (175) 131
-------- -------- -------- --------
Comprehensive income $ 8,023 $ 13,063 $ 26,467 $ 22,693
======== ======== ======== ========
</TABLE>
The Company paid cash during the first nine months of 1998 of $6.5 million
for interest and $28.7 million for taxes, compared with $3.3 million for
interest and $29.8 million for taxes during the first three quarters of 1999.
The Company had non cash financing activities in the third quarter of 1998 of
$35.9 million resulting from the conversion of long-term debt to common stock.
4. BUSINESS COMBINATIONS --
On February 10, 1999, the Company combined with Moores Retail Group Inc.
("Moores"), a privately owned Canadian corporation, in exchange for securities
("Exchangeable Shares") exchangeable for 2.5 million shares of the Company's
common stock. The Exchangeable Shares have substantially identical economic and
legal rights as, and will ultimately be exchanged on a one-on-one basis for,
shares of the Company's common stock. The Exchangeable Shares were issued to the
shareholders and option holders of Moores in exchange for all of the outstanding
shares of capital stock and options of Moores because of Canadian tax law
considerations. All Exchangeable Shares must be converted into common stock of
the Company within five years and are reflected as common stock outstanding for
financial reporting purposes by the Company. The combination with Moores has
been accounted for as a pooling of interests.
On June 1, 1999, the Company combined with K&G Men's Center, Inc. ("K&G"),
a superstore retailer of men's apparel and accessories operating 34 stores in 16
states, with K&G becoming a wholly owned subsidiary of the Company. The Company
issued approximately 4.4 million shares of its common stock to K&G shareholders
based on an exchange ratio of 0.43 of a share of the Company's common stock for
each share of K&G common stock outstanding. In addition, the Company converted
the outstanding options to purchase K&G common stock, whether vested or
unvested, into options to purchase 228,000 shares of the Company's common stock
based on the exchange ratio of 0.43. The combination has been accounted for as a
pooling of interests.
In conjunction with the Moores and K&G combinations, the Company recorded
transaction costs of $7.7 million, duplicative stores closing costs of $6.1
million and litigation costs of $0.9 million. The transaction costs were
composed primarily of investment banking fees, professional fees and contract
termination payments, while the duplicative store closing costs consisted
primarily of lease termination payments and the write-off of fixed assets
associated with the closing of duplicate store sites in existing markets. The
litigation charge resulted from the settlement of a lawsuit filed by a former
K&G employee related to his employment relationship with K&G. In addition, the
Company recorded an extraordinary charge of $2.9 million, net of a $1.4 million
tax benefit, related to the write-off of deferred financing costs and prepayment
penalties for the refinancing of approximately US$57 million of Moores'
indebtedness.
6
<PAGE> 9
The following is a reconciliation of the amounts of revenues and net
earnings previously reported by the Company to the combined amounts of revenues
and earnings after giving effect to the combinations with Moores on February 10,
1999 and K&G on June 1, 1999 (in thousands):
<TABLE>
<CAPTION>
NINE THREE
THREE MONTHS ENDED MONTHS MONTHS
------------------------------------------ ENDED ENDED
MAY 2, AUGUST 1, OCTOBER 31, OCTOBER 31, MAY 1,
1998 1998 1998 1998 1999
--------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues
The Men's Wearhouse (as previously reported) $ 170,850 $ 162,858 $ 170,742 $ 504,450 $ 222,183
Moores 28,671 33,452 32,559 94,682 --
K&G 30,309 30,270 30,972 91,551 36,669
--------- --------- --------- --------- ---------
Combined $ 229,830 $ 226,580 $ 234,273 $ 690,683 $ 258,852
========= ========= ========= ========= =========
Net earnings (loss)
The Men's Wearhouse (as previously reported) $ 6,718 $ 8,014 $ 6,559 $ 21,291 $ (500)
Moores 86 1,074 654 1,814 --
K&G 1,322 1,301 914 3,537 1,340
--------- --------- --------- --------- ---------
Combined $ 8,126 $ 10,389 $ 8,127 $ 26,642 $ 840
========= ========= ========= ========= =========
</TABLE>
The separate results of operations for K&G in fiscal 1999 for the period
prior to its combination with the Company are reflected in the table above for
the three months ended May 1, 1999. The fiscal 1999 extraordinary item of
$2,912, net of tax, reported by the Company was not affected by the combination
with K&G.
7
<PAGE> 10
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 for the year ended January 30, 1999. 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 "1999" mean the fiscal year ending January 29, 2000.
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>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED YEAR ENDED
------------------------------ ------------------------------- ---------------
OCTOBER 31, OCTOBER 30, OCTOBER 31, OCTOBER 30, JANUARY 30,
1998 1999 1998 1999 1999
------------- ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Stores open at beginning of period 555 589 526 579 526
Opened 15 13 44 36 65
Acquired -- -- 4 -- 4
Closed (12) -- (16) (13) (16)
--- --- --- --- ---
Stores open at end of period 558 602 558 602 579
=== === === === ===
Stores open at end of period:
U.S. --
Men's Wearhouse 396 437 396 437 411
K&G/SuitMax/Suit Warehouse 44 52 44 52 49
C&R and Moores 12 -- 12 -- 12
--- --- --- --- ---
452 489 452 489 472
Canada-- Moores 106 113 106 113 107
--- --- --- --- ---
558 602 558 602 579
=== === === === ===
</TABLE>
RESULTS OF OPERATIONS
Three Months Ended October 31, 1998 and October 30, 1999
--------------------------------------------------------
The Company's net sales were $272.8 million for the quarter ended October
30, 1999, a $38.6 million or 16.5% increase over the same prior year period.
This increase was due primarily to sales resulting from the increased number of
stores and increased sales at existing stores. Sales from U.S. stores
represented 88.4% of total sales in the third quarter of 1999, compared with
86.5% of total sales in the third quarter of 1998. 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 10.7% for the U.S. stores from the same prior year quarter, while
comparable store sales for the Canadian stores decreased 2.4% from the same
prior year quarter.
Gross margin increased 19.1% over the same prior year quarter to $99.6
million in the third quarter of 1999. As a percentage of sales, gross margin
increased from 35.7% in the third quarter of 1998 to 36.5% in the third quarter
of 1999. This increase in gross margin predominantly resulted from a decrease in
product, occupancy and alteration costs as a percentage of sales.
Selling, general and administrative ("SG&A") expenses decreased slightly as
a percentage of sales from 28.2% for the quarter ended October 31, 1998 to 28.1%
for the quarter ended October 30, 1999, and SG&A expenditures increased by $10.7
million to $76.8 million. On an absolute dollar basis, the principal components
of SG&A expenses increased primarily
8
<PAGE> 11
due to the Company's growth. Advertising expense remained constant at 6.0% of
net sales; store salaries increased from 11.0% to 11.2% of net sales and other
SG&A expenses decreased from 11.2% to 10.9% of net sales.
Interest expense, net of interest income, decreased from $2.2 million in the
third quarter of 1998 to $0.9 million in the third quarter of 1999. Weighted
average borrowings outstanding decreased from $103.9 million in the prior year
to $64.7 million in the third quarter of 1999, and the weighted average interest
rate on outstanding indebtedness decreased from 9.3% to 6.5%. The weighted
average borrowings outstanding decreased primarily as a result of the redemption
of the 5 1/4% Convertible Subordinated Notes in the third quarter of 1998. The
decrease in the weighted average interest rate was due primarily to the
refinancing of debt concurrent with the Moores combination.
The Company's effective income tax rate decreased from 42.8% for the third
quarter of 1998 to 40.8% for the third quarter of 1999. The effective tax rate
for the third quarter of 1999 was higher than the statutory U.S. federal rate of
35% primarily due to the effect of state income taxes, Canadian earnings which
are taxed at a higher statutory rate 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,
in the third quarter of 1998 resulted from the early retirement of the Company's
5 1/4% Convertible Subordinated Debt.
Nine Months Ended October 31, 1998 and October 30, 1999
-------------------------------------------------------
The Company's net sales increased $97.6 million, or 14.1%, to $788.3 million
for the nine months ended October 30, 1999 due primarily to sales resulting from
the increased number of stores and increased sales at existing stores. Sales
from U.S. stores represented 88.6% of total sales in the first three quarters of
1999, compared with 86.8% of total sales in the same prior year period.
Comparable store sales increased 8.0% for the U.S. stores from the same prior
year period, while comparable store sales for the Canadian stores decreased 4.1%
from the same prior year period.
Gross margin increased to $284.3 million for the first nine months of 1999,
a 15.0% increase from the same prior year period. As a percentage of sales,
gross margin increased from 35.8% in the first nine months of 1998 to 36.1% for
the first nine months of 1999. This gross margin increase resulted from a
decrease in product costs as a percentage of sales offset by higher occupancy
costs.
Selling, general and administrative expenses as a percentage of sales
decreased slightly from 28.0% to 27.9% for the first nine months of 1998 and
1999, respectively, while SG&A expenditures increased by $26.9 million to $220.1
million. On an absolute dollar basis, the principal components of SG&A expenses
increased primarily due to the Company's growth. Advertising expense decreased
from 6.2% to 5.9% of net sales, store salaries increased from 10.8% to 11.0% of
net sales and other SG&A expenses remained constant at 11.0% of net sales.
As a result of the Moores and K&G combinations, the Company recorded
transaction costs of $7.7 million, duplicative stores closing costs of $6.1
million and litigation costs of $0.9 million. The transaction costs were
composed primarily of investment banking fees, professional fees and contract
termination payments, while the duplicative store closing costs consisted
primarily of lease termination payments and the write-off of fixed assets
associated with the closing of duplicate store sites in existing markets. The
litigation charge resulted from the settlement of a lawsuit filed by a former
K&G employee related to his employment relationship with K&G. In addition, the
Company recorded an extraordinary charge of $2.9 million, net of a $1.4 million
tax benefit, related to the write-off of deferred financing costs and prepayment
penalties for the refinancing of approximately US$57 million of Moores'
indebtedness. The extraordinary charge of $0.7 million, net of a $0.5 million
tax benefit, in the third quarter of 1998 resulted from the early retirement of
the Company's 5 1/4% Convertible Subordinated Debt.
Interest expense, net of interest income, decreased from $6.2 million for
the first nine months of 1998 to $2.2 million for the first nine months of 1999.
Weighted average borrowings outstanding decreased $49.0 million from the prior
year to $63.9 million in the first three quarters of 1999, and the weighted
average interest rate on outstanding indebtedness decreased from 9.2% to 6.7%.
The weighted average borrowings outstanding decreased primarily as a result of
the redemption of the 5 1/4% Convertible Subordinated Notes in the third quarter
of 1998. The decrease in the weighted average interest rate was due primarily to
the refinancing of debt concurrent with the Moores combination.
9
<PAGE> 12
The Company's effective income tax rate decreased from 42.8% for the nine
months ended October 31, 1998 to 40.9% (before the effect of transaction costs
which are mostly not deductible for income tax purposes) for the nine months
ended October 30, 1999. The effective tax rate for the first three quarters of
1999 was higher than the statutory U.S. federal rate of 35% primarily due to the
effect of state income taxes, Canadian earnings which are taxed at a higher
statutory rate and the nondeductibility of a portion of meal and entertainment
expenses.
The Company's earnings before extraordinary item, as reported and after the
effect of non-recurring charges, were as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
----------------------------
OCTOBER 31, OCTOBER 30,
1998 1999
----------- -----------
<S> <C> <C>
Earnings before extraordinary item, as reported $27,343 $25,474
Transaction costs, net of tax benefit of $633 -- 7,074
Duplicative store closing costs, net of tax benefit of $2,471 -- 3,599
Litigation costs, net of tax benefit of $372 -- 558
------- -------
Earnings before extraordinary item and non-recurring charges $27,343 $36,705
======= =======
Diluted earnings per share before extraordinary
item, as reported $ 0.66 $ 0.60
======= =======
Diluted earnings per share before extraordinary
item and non-recurring charges $ 0.66 $ 0.86
======= =======
</TABLE>
10
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $8.8 million in the first nine
months of 1999 compared with net cash used in operating activities of $33.6
million in the first nine months of 1998. These amounts primarily represent net
earnings before extraordinary items plus depreciation, amortization and other
non-cash charges and increases in accounts payable and accrued expenses, offset
by increases in inventories and other assets and decreases in income taxes
payable and other liabilities Inventories increased $64.5 million and $93.1
million for the three quarters ended October 30, 1999 and October 31, 1998,
respectively. The increase for the first nine months of 1999 and 1998 primarily
related 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 $266.9 million at October 30, 1999, which is up from
$230.6 million at January 30, 1999 and $251.3 million at October 31, 1998.
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.
Cash used in investing activities was $25.4 million and $34.4 million for
the first three quarters of 1999 and 1998, respectively. For the nine months
ended October 30, 1999, cash used in investing activities was primarily
comprised of capital expenditures of $28.9 million relating primarily to stores
opened, remodeled or relocated during the quarter or under construction at the
end of the quarter and infrastructure technology investments.
In February 1999, the Company amended and restated its revolving credit
agreement with a group of banks (the "Credit Agreement"). This agreement
provides for borrowing of up to $125 million through February 5, 2004. Advances
under the Credit Agreement bear interest at a rate per annum equal to, at the
Company's option, the agent's prime rate or the reserve adjusted LIBOR rate plus
an interest rate margin varying between .75% to 1.25%. The Credit Agreement
provides for fees applicable to unused commitments of .125% to .225%. As of
October 30, 1999, there were no amounts outstanding under the Credit Agreement.
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, fixed charge and current ratios. 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, make acquisitions, issue options or
enter into transactions with affiliates. The Company is in compliance with the
covenants in the Credit Agreement.
In February 1999, the Company also entered into two new Canadian credit
facilities in conjunction with the combination with Moores. These facilities
include a revolving credit agreement which provides for borrowings up to Can$30
million (US$20 million) through February 5, 2004 and a term credit agreement
which provides for borrowings of Can$75 million (US$50 million) to be repaid in
quarterly installments of Can$0.9 million (US$0.6 million) beginning in May
1999; remaining unpaid principal is payable on February 5, 2004. Covenants and
interest rates are substantially similar to those contained in the Company's
Credit Agreement. Borrowings outstanding under these agreements of US$59.8
million at October 30, 1999 were used to repay approximately US$57 million in
outstanding indebtedness of Moores and to fund operating and other requirements
of Moores.
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.
In connection with the Company's direct sourcing program, the Company may
enter into purchase commitments that are denominated in a foreign currency
(primarily the Italian lira). 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
11
<PAGE> 14
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 net assets.
YEAR 2000
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.
Due to the dramatic changes in the state of the art of 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 U.S. 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 investments in
technology in the past, and it is anticipated that these modifications will
further increase the benefit that it 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 $20.0 million and $25.0 million
including past and future expenditures. The amounts of expenditures related
specifically to Year 2000 date conversion compliance are not separable from this
amount. The Company believes that substantially all of its business systems are
now Year 2000 compliant. However, no assurances can be given that the Company
will be able to completely identify or address all Year 2000 compliance issues,
or that third parties with whom it does business will not experience system
failures as a result of the Year 2000 issue, nor can the Company fully predict
the consequences of noncompliance.
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 its buildings, property and equipment. The Company has completed
substantially all of the process of implementing converted and replacement
systems for all of its non-compliant hardware and software systems to ensure
that the operations 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 98% 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 significant
additional expenditures to address the Year 2000 issue beyond those associated
with the updating and upgrading of the information systems discussed above.
The Company has requested and has received written responses from all of
its significant U.S. vendors and suppliers confirming that they will be Year
2000 compliant. Of the 52 current vendors and suppliers with whom the Company
exchanges information by some form of electronic transfer, 51 have indicated
that they have tested their systems and found them to be Year 2000 compliant and
one has indicated that it is in the process of completing its conversion and/or
testing. The Company will continue to monitor these vendors and suppliers, as
well as any new vendors or suppliers.
The Company, through Moores, has also been in the process of updating and
upgrading its Canadian information systems to be Year 2000 compliant. Moores has
converted or reprogrammed its payroll, accounting and merchandising systems to
ensure that the operation of such systems will not be materially adversely
affected by the Year 2000 date change. With respect to its point of sale system,
Moores has completed the installation in its stores of new equipment and
software that is Year 2000 compliant. Moores has also completed the process of
evaluating the machinery and embedded technology involved in its manufacturing
operations and has determined that the manufacturing technology is Year 2000
compliant. Moores total costs related to Year 2000 compliance approximated
Can$500,000.
Moores has requested and is in the process of receiving written responses
from its vendors and suppliers confirming that the vendor or supplier is Year
2000 compliant. Moores will continue to monitor these vendors and suppliers, as
well as those that have not provided written assurance. Moores expects to use
alternate sources to replace those vendors and suppliers who do not provide
written assurance of their Year 2000 readiness.
K&G has completed an evaluation of its management information systems to
determine their readiness in terms of Year 2000 issues, and determined that its
point-of-sale cash register systems are the only major application that required
significant modification in order to be Year 2000 ready. K&G has replaced its
current registers with a new computer-based register
12
<PAGE> 15
system. The costs to purchase and implement these register systems totaled
approximately $1.5 million. K&G has developed a plan to determine the Year 2000
readiness of its suppliers or other third parties with which K&G conducts
business. Additionally, K&G has developed a contingency plan to address the
possibility of failure of any of its significant suppliers to reach Year 2000
readiness.
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 would require the processing of credit approvals by telephone and the
ordering and allocation of inventory by telephone. While each of these 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 its results of operations.
If the Company is unable to purchase or receive inventory, or is unable to
arrange for the manufacture of acquired piece goods into tailored clothing, such
failure, depending on how extensive, could have a material adverse effect on its
operations. However, no vendor or supplier accounts for more than 10% of the
inventory the Company purchases and in most cases alternative suppliers are
available.
At the manufacturing level, if all suppliers were unable to supply the
fabric needs of the manufacturing operations, then, given this worst case
scenario, one to two months of production could be lost. However, no one
supplier accounts for more than 14% of the fabric used and this supplier has
provided a written response that it is Year 2000 compliant. Moores anticipates
that if any one supplier is unable to provide fabric, an alternate source could
be found to meet production needs. If there is a significant disruption in the
supply chain due to the Year 2000 issue and the amount of fabric available from
suppliers is limited, it may be difficult to obtain the fabric necessary to meet
the demands of the manufacturing operations and available fabric may experience
a significant increase in cost.
ITEM 3 -QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to exposure from fluctuations in U.S. dollar/Italian
lira exchange rates. The Company utilizes foreign currency forward exchange
contracts to limit exposure to changes in currency exchange rates (See
"Management's Discussion and Analysis of Financial Information and Results of
Operations - Liquidity and Capital Resources"). At October 30, 1999, the Company
had 23 contracts maturing in varying increments to purchase an aggregate
notional amount of $20.4 million in foreign currency. These forward contracts do
not extend beyond January 2001. Unrealized pretax losses on these forward
contracts totaled approximately $0.6 million at October 30, 1999.
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
capital expenditures, borrowings, acquisitions (including the amount and nature
thereof), 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.
Actual results and trends in the future may differ materially depending on a
variety of factors including, but not limited to, domestic and international
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.
13
<PAGE> 16
PART II
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.
14
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, The Men's Wearhouse, Inc., has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: December 14, 1999 THE MEN'S WEARHOUSE, INC.
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
15
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C> <C>
27.1 -- Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> OCT-30-1999
<CASH> 14,779
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 368,087
<CURRENT-ASSETS> 406,386
<PP&E> 237,425
<DEPRECIATION> 107,515
<TOTAL-ASSETS> 585,100
<CURRENT-LIABILITIES> 139,493
<BONDS> 57,272
0
0
<COMMON> 397
<OTHER-SE> 380,086
<TOTAL-LIABILITY-AND-EQUITY> 585,100
<SALES> 788,268
<TOTAL-REVENUES> 788,268
<CGS> 503,945
<TOTAL-COSTS> 503,945
<OTHER-EXPENSES> 234,772
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,178
<INCOME-PRETAX> 47,373
<INCOME-TAX> 21,899
<INCOME-CONTINUING> 25,474
<DISCONTINUED> 0
<EXTRAORDINARY> 2,912
<CHANGES> 0
<NET-INCOME> 22,562
<EPS-BASIC> 0.54
<EPS-DILUTED> 0.53
</TABLE>
