Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended October 29, 2016 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 1-16097

 

TAILORED BRANDS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Texas

 

47-4908760

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification Number)

 

 

 

6380 Rogerdale Road

 

 

Houston, Texas

 

77072-1624

(Address of Principal Executive Offices)

 

(Zip Code)

 

(281) 776-7000

(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 ☒. No ☐.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒. No ☐.

 

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

 

Large accelerated filer  ☒

 

Accelerated filer  ☐

 

 

 

Non-accelerated filer  ☐

(Do not check if a smaller reporting company)

Smaller reporting company  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ☐. No ☒.

 

The number of shares of common stock of the Registrant, par value $.01 per share, outstanding at November 25, 2016 was 48,744,325.

 

 

 

 

 


 

Table of Contents

REPORT INDEX

 

 

 

 

Part and Item No.

 

Page No.

 

 

 

 

 

 

PART I — Financial Information

 

 

 

 

 

Item 1 — Condensed Consolidated Financial Statements (unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets as of October 29, 2016, October 31, 2015 and January 30, 2016 

 

 

 

 

Condensed Consolidated Statements of Earnings (Loss) for the Three and Nine Months Ended October 29, 2016 and October 31, 2015 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended October 29, 2016 and October 31, 2015 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 29, 2016 and October 31, 2015 

 

 

 

 

Notes to Condensed Consolidated Financial Statements 

 

 

 

 

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations 

 

29 

 

 

 

Item 3 — Quantitative and Qualitative Disclosures about Market Risk 

 

42 

 

 

 

Item 4 — Controls and Procedures 

 

42 

 

 

 

PART II — Other Information 

 

 

 

 

 

Item 1 — Legal Proceedings 

 

43 

 

 

 

Item 1A — Risk Factors 

 

43 

 

 

 

Item 6 — Exhibits 

 

43 

 

 

 

SIGNATURES 

 

44 

 

 

 

 

 

 


 

Table of Contents

Forward-Looking and Cautionary Statements

 

Certain statements made in this Quarterly Report on Form 10-Q and in other public filings and press releases by the Company (as defined below) contain “forward-looking” information (as defined in the Private Securities Litigation Reform Act of 1995) that involves risk and uncertainty.  Forward-looking statements reflect our current views regarding certain events that could affect our financial condition or results of operations and may include, but are not limited to, references to future sales, comparable sales, earnings, margins, costs, number and costs of store openings, closings and expansions, profitability, capital expenditures, potential acquisitions, synergies from acquisitions, demand for clothing, market trends in the retail and corporate apparel clothing business, currency fluctuations, inflation and various economic and business trends.  Forward-looking statements may be made by management orally or in writing, including, but not limited to, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Quarterly Report on Form 10-Q and other sections of our filings with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and the Securities Act of 1933, as amended.

 

Forward-looking statements are not guarantees of future performance and a variety of factors could cause actual results to differ materially from the anticipated or expected results expressed in or suggested by these forward-looking statements.  Factors that might cause or contribute to such differences include, but are not limited to: actions by governmental entities; domestic and international macro-economic conditions; inflation or deflation; the loss of, or changes in, key personnel; success, or lack thereof, in executing our internal strategies and operating plans including new store and new market expansion plans, cost reduction initiatives, store rationalization plans, profit improvement plans, revenue enhancement strategies and the impact of opening tuxedo shops within Macy’s stores; changes in demand for clothing; market trends in the retail business; customer confidence and spending patterns; changes in traffic trends in our stores; customer acceptance of our merchandise strategies; performance issues with key suppliers; disruptions in our supply chain; severe weather; foreign currency fluctuations; government export and import policies; advertising or marketing activities of competitors; and legal proceedings.

 

Forward-looking statements are based upon management’s current beliefs or expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies and third party approvals, many of which are beyond our control.  Refer to “Risk Factors” contained in Part I of our Annual Report on Form 10-K for the year ended January 30, 2016, Part 1A of our Quarterly Report on Form 10-Q for the quarter ended July 30, 2016, and elsewhere herein for a more complete discussion of these and other factors that might affect our performance and financial results. Forward-looking statements are intended to convey the Company’s expectations about the future and speak only as of the date they are made.  We undertake no obligation to publicly update or revise any forward-looking statements that may be made from time to time, whether as a result of new information, future developments or otherwise, unless required to do so by law.

 

All written or oral forward-looking statements that are made by or attributable to us are expressly qualified in their entirety by this cautionary notice.

 

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Table of Contents

PART I – FINANCIAL INFORMATION

 

ITEM 1 – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

TAILORED BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

October 29,

    

October 31,

    

January 30,

 

 

 

2016

 

2015

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

34,948

 

$

53,654

 

$

29,980

 

Accounts receivable, net

 

 

71,898

 

 

66,902

 

 

63,890

 

Inventories

 

 

1,047,915

 

 

1,060,247

 

 

1,022,504

 

Other current assets

 

 

60,190

 

 

168,071

 

 

143,546

 

Total current assets

 

 

1,214,951

 

 

1,348,874

 

 

1,259,920

 

PROPERTY AND EQUIPMENT, net

 

 

501,391

 

 

548,481

 

 

521,824

 

RENTAL PRODUCT, net

 

 

160,101

 

 

147,344

 

 

157,460

 

GOODWILL

 

 

116,026

 

 

890,991

 

 

118,586

 

INTANGIBLE ASSETS, net

 

 

172,337

 

 

568,171

 

 

178,510

 

OTHER ASSETS

 

 

10,323

 

 

8,518

 

 

8,019

 

TOTAL ASSETS

 

$

2,175,129

 

$

3,512,379

 

$

2,244,319

 

LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

200,199

 

$

233,520

 

$

237,114

 

Accrued expenses and other current liabilities

 

 

280,658

 

 

265,993

 

 

256,762

 

Income taxes payable

 

 

917

 

 

13,218

 

 

 —

 

Current portion of long-term debt

 

 

7,000

 

 

7,000

 

 

42,451

 

Total current liabilities

 

 

488,774

 

 

519,731

 

 

536,327

 

LONG-TERM DEBT, net

 

 

1,588,873

 

 

1,649,206

 

 

1,613,473

 

DEFERRED TAXES AND OTHER LIABILITIES

 

 

175,179

 

 

358,059

 

 

194,605

 

Total liabilities

 

 

2,252,826

 

 

2,526,996

 

 

2,344,405

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' (DEFICIT) EQUITY:

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

 

 —

 

 

 —

 

 

 —

 

Common stock

 

 

487

 

 

485

 

 

485

 

Capital in excess of par

 

 

466,817

 

 

452,666

 

 

455,765

 

(Accumulated deficit) retained earnings

 

 

(499,663)

 

 

541,672

 

 

(524,876)

 

Accumulated other comprehensive loss

 

 

(45,338)

 

 

(6,356)

 

 

(28,486)

 

Treasury stock, at cost

 

 

 —

 

 

(3,084)

 

 

(2,974)

 

Total shareholders' (deficit) equity

 

 

(77,697)

 

 

985,383

 

 

(100,086)

 

TOTAL LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY

 

$

2,175,129

 

$

3,512,379

 

$

2,244,319

 

 

See Notes to Condensed Consolidated Financial Statements.

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Table of Contents

TAILORED BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)

(In thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

    

October 29, 2016

    

October 31, 2015

    

October 29, 2016

    

October 31, 2015

 

Net sales:

 

 

    

 

 

    

 

 

    

    

 

    

 

Retail clothing product

 

$

575,046

 

$

615,874

 

$

1,806,660

 

$

1,931,926

 

Rental services

 

 

138,724

 

 

132,443

 

 

403,564

 

 

392,621

 

Alteration and other services

 

 

49,919

 

 

53,070

 

 

149,888

 

 

160,024

 

Total retail sales

 

 

763,689

 

 

801,387

 

 

2,360,112

 

 

2,484,571

 

Corporate apparel clothing product

 

 

83,245

 

 

64,059

 

 

225,328

 

 

186,038

 

Total net sales

 

 

846,934

 

 

865,446

 

 

2,585,440

 

 

2,670,609

 

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail clothing product

 

 

247,978

 

 

274,348

 

 

796,215

 

 

850,782

 

Rental services

 

 

22,958

 

 

21,431

 

 

65,943

 

 

62,866

 

Alteration and other services

 

 

33,526

 

 

36,260

 

 

104,085

 

 

109,528

 

Occupancy costs

 

 

108,923

 

 

114,629

 

 

327,673

 

 

341,980

 

Total retail cost of sales

 

 

413,385

 

 

446,668

 

 

1,293,916

 

 

1,365,156

 

Corporate apparel clothing product

 

 

56,343

 

 

45,787

 

 

152,173

 

 

132,229

 

Total cost of sales

 

 

469,728

 

 

492,455

 

 

1,446,089

 

 

1,497,385

 

Gross margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail clothing product

 

 

327,068

 

 

341,526

 

 

1,010,445

 

 

1,081,144

 

Rental services

 

 

115,766

 

 

111,012

 

 

337,621

 

 

329,755

 

Alteration and other services

 

 

16,393

 

 

16,810

 

 

45,803

 

 

50,496

 

Occupancy costs

 

 

(108,923)

 

 

(114,629)

 

 

(327,673)

 

 

(341,980)

 

Total retail gross margin

 

 

350,304

 

 

354,719

 

 

1,066,196

 

 

1,119,415

 

Corporate apparel clothing product

 

 

26,902

 

 

18,272

 

 

73,155

 

 

53,809

 

Total gross margin

 

 

377,206

 

 

372,991

 

 

1,139,351

 

 

1,173,224

 

Advertising expense

 

 

45,656

 

 

47,991

 

 

138,547

 

 

143,628

 

Selling, general and administrative expenses

 

 

270,494

 

 

271,301

 

 

849,122

 

 

822,485

 

Tradename impairment charge

 

 

 —

 

 

90,100

 

 

 —

 

 

90,100

 

Operating income (loss)

 

 

61,056

 

 

(36,401)

 

 

151,682

 

 

117,011

 

Interest income

 

 

52

 

 

50

 

 

102

 

 

140

 

Interest expense

 

 

(25,476)

 

 

(26,457)

 

 

(77,853)

 

 

(79,475)

 

Gain (loss) on extinguishment of debt, net

 

 

1,808

 

 

 —

 

 

1,737

 

 

(12,675)

 

Earnings (loss) before income taxes

 

 

37,440

 

 

(62,808)

 

 

75,668

 

 

25,001

 

Provision (benefit) for income taxes

 

 

9,007

 

 

(35,654)

 

 

20,623

 

 

(5,993)

 

Net earnings (loss)

 

$

28,433

 

$

(27,154)

 

$

55,045

 

$

30,994

 

Net earnings (loss) per common share allocated to common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.58

 

$

(0.56)

 

$

1.13

 

$

0.64

 

Diluted

 

$

0.58

 

$

(0.56)

 

$

1.13

 

$

0.64

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

48,655

 

 

48,339

 

 

48,570

 

 

48,258

 

Diluted

 

 

48,812

 

 

48,339

 

 

48,691

 

 

48,513

 

Cash dividends declared per common share

 

$

0.18

 

$

0.18

 

$

0.54

 

$

0.54

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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TAILORED BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

    

October 29,

    

October 31,

    

October 29,

    

October 31,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

28,433

 

$

(27,154)

 

$

55,045

 

$

30,994

 

Currency translation adjustments

 

 

(15,075)

 

 

(2,024)

 

 

(18,246)

 

 

(378)

 

Unrealized gain (loss) on cash flow hedges, net of tax

 

 

948

 

 

(222)

 

 

1,394

 

 

(307)

 

Comprehensive income (loss)

 

$

14,306

 

$

(29,400)

 

$

38,193

 

$

30,309

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

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Table of Contents

TAILORED BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended

 

 

 

October 29,

 

October 31,

 

 

    

2016

    

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net earnings

 

$

55,045

 

$

30,994

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

87,838

 

 

98,162

 

Rental product amortization

 

 

35,982

 

 

30,496

 

Tradename impairment charge

 

 

 —

 

 

90,100

 

(Gain) loss on extinguishment of debt, net

 

 

(1,737)

 

 

12,675

 

Amortization of deferred financing costs

 

 

4,922

 

 

5,151

 

Amortization of discount on long-term debt

 

 

728

 

 

848

 

Loss (gain) on disposition of assets

 

 

616

 

 

(833)

 

Asset impairment charges

 

 

4,293

 

 

1,695

 

Share-based compensation

 

 

13,958

 

 

12,614

 

Excess tax benefits from share-based plans

 

 

 —

 

 

(1,104)

 

Deferred tax benefit

 

 

(13,233)

 

 

(61,108)

 

Deferred rent expense and other

 

 

(1,281)

 

 

3,141

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(13,273)

 

 

7,116

 

Inventories

 

 

(32,833)

 

 

(122,294)

 

Rental product

 

 

(37,817)

 

 

(45,704)

 

Other assets

 

 

84,844

 

 

6,210

 

Accounts payable, accrued expenses and other current liabilities

 

 

(4,314)

 

 

29,778

 

Income taxes payable

 

 

(2,065)

 

 

13,357

 

Other liabilities

 

 

(4,789)

 

 

942

 

Net cash provided by operating activities

 

 

176,884

 

 

112,236

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Capital expenditures

 

 

(80,550)

 

 

(86,406)

 

Proceeds from sales of property and equipment

 

 

605

 

 

2,613

 

Net cash used in investing activities

 

 

(79,945)

 

 

(83,793)

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Payments on term loan

 

 

(40,701)

 

 

(6,250)

 

Proceeds from asset-based revolving credit facility

 

 

520,550

 

 

5,500

 

Payments on asset-based revolving credit facility

 

 

(520,550)

 

 

(5,500)

 

Repurchase and retirement of senior notes

 

 

(25,000)

 

 

 —

 

Deferred financing costs

 

 

 —

 

 

(3,566)

 

Cash dividends paid

 

 

(26,438)

 

 

(26,269)

 

Proceeds from issuance of common stock

 

 

1,451

 

 

2,454

 

Tax payments related to vested deferred stock units

 

 

(1,258)

 

 

(4,538)

 

Excess tax benefits from share-based plans

 

 

 —

 

 

1,104

 

Repurchases of common stock

 

 

 —

 

 

(277)

 

Net cash used in financing activities

 

 

(91,946)

 

 

(37,342)

 

Effect of exchange rate changes

 

 

(25)

 

 

292

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

4,968

 

 

(8,607)

 

Balance at beginning of period

 

 

29,980

 

 

62,261

 

Balance at end of period

 

$

34,948

 

$

53,654

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

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Table of Contents

TAILORED BRANDS, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1. Significant Accounting Policies  

 

Basis of Presentation — Effective January 31, 2016, Tailored Brands, Inc., a Texas corporation (“Tailored Brands”), became the successor reporting company to The Men’s Wearhouse, Inc. (“Men’s Wearhouse”), pursuant to a holding company reorganization (the “Reorganization”). Upon completion of the Reorganization, each issued and outstanding share of common stock of Men's Wearhouse was automatically converted into one share of common stock of Tailored Brands, having the same designations, preferences, limitations, and relative rights and corresponding obligations as the shares of common stock of Men's Wearhouse. In addition, as part of the Reorganization, Men's Wearhouse's treasury shares were canceled. The consolidated assets and liabilities of Tailored Brands and its subsidiaries immediately after the Reorganization were the same as the consolidated assets and liabilities of Men's Wearhouse immediately prior to the Reorganization.

 

The condensed consolidated financial statements herein include the accounts of Tailored Brands, 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.  We believe the presentation and disclosures herein are adequate to make the information not misleading, and the condensed consolidated financial statements reflect all elimination entries and normal recurring adjustments which are necessary for a fair presentation of the financial position, results of operations and cash flows at the dates and for the periods presented. Certain prior period amounts have been reclassified to conform to the current period presentation.

 

Our business results historically have fluctuated throughout the year and, as a result, the operating results of the interim periods presented are not necessarily indicative of the results that may be achieved for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended January 30, 2016.

 

Unless the context otherwise requires, “Company”, “we”, “us” and “our” refer to Tailored Brands, Inc. and its subsidiaries.

 

The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts and related disclosures.  Actual amounts could differ from those estimates.

 

Recent Accounting Pronouncements — We have considered all new accounting pronouncements and have concluded there are no new pronouncements that may have a material impact on our results of operations, financial condition, or cash flows, based on current information, except for those listed below. 

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation-Stock Compensation. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for public companies for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years with early adoption permitted. We will adopt ASU 2016-09 beginning in the first quarter of fiscal 2017 and we do not expect it will have a material impact on our financial position, results of operations or cash flows.  However, under certain circumstances, this guidance could have an impact on our effective tax rate as changes between tax and book treatment of equity compensation will be recognized in the provision for income taxes beginning in fiscal 2017.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases.  ASU 2016-02 increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  The main difference between previous U.S. GAAP and ASU 2016-02 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. ASU 2016-02 is effective for public companies for annual reporting periods beginning after December 15, 2018, and interim periods within those fiscal years.  Early adoption of ASU 2016-02 is permitted.  The guidance is required to be adopted

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

using the modified retrospective approach.  We are currently evaluating the impact ASU 2016-02 will have on our financial position, results of operations and cash flows but expect that it will result in a significant increase in our long-term assets and liabilities given we have a significant number of leases.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, to clarify the principles used to recognize revenue for all entities.  In August 2015, the FASB issued ASU No. 2015-14 which deferred the effective date of ASU 2014-09 by one year.  As a result of this deferral, ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted for annual reporting periods beginning after December 15, 2016.  The guidance allows for either a full retrospective or a modified retrospective transition method.  We are continuing to evaluate our method of adoption and the impact this guidance, including recent amendments and interpretations, may have on our financial position, results of operations and cash flows. 

 

2.  Restructuring and Other Charges

 

During the fourth quarter of fiscal 2015, we began implementing initiatives intended to reduce costs and improve operating performance.  These initiatives include a store rationalization program which identified approximately 250 stores to be closed as well as a profit improvement program to drive operating efficiencies and improve our expense structure.  The store rationalization program includes the closure of approximately 80 to 90 Jos. A. Bank full line stores, the closure of all factory and outlet stores at Jos. A. Bank and Men’s Wearhouse (58 stores) and the closure of between 100 and 110 Men’s Wearhouse and Tux stores primarily as the result of the rollout of our shops within Macy’s stores.  We expect the store rationalization and profit improvement programs to be completed in fiscal 2016. 

 

A summary of the charges incurred for the three and nine months ended October 29, 2016 along with cumulative charges incurred under these initiatives since inception is presented in the table below (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

For the Three Months Ended

    

For the Nine Months Ended

    

 

 

 

 

 

October 29,

 

October 29,

 

 

 

 

 

 

2016

 

2016

 

Cumulative

 

Lease termination costs

 

$

8,667

 

$

37,004

 

$

37,004

 

Store asset impairment charges and accelerated depreciation, net of deferred rent

 

 

(844)

 

 

2,330

 

 

25,476

 

Consulting costs

 

 

1,806

 

 

13,583

 

 

14,501

 

Inventory reserve charges

 

 

 —

 

 

 —

 

 

11,008

 

Favorable lease impairment charges

 

 

 —

 

 

 —

 

 

5,533

 

Severance and employee-related costs

 

 

481

 

 

4,643

 

 

4,643

 

Other costs

 

 

839

 

 

1,565

 

 

2,423

 

Total pre-tax restructuring and other charges(1)

 

$

10,949

 

$

59,125

 

$

100,588

 


(1)

Consists of $12.4 million included in selling, general and administrative expenses (“SG&A”) offset by a $1.5 million reduction in cost of sales for the three months ended October 29, 2016. Consists of $61.8 million included in SG&A offset by a $2.7 million reduction in cost of sales for the nine months ended October 29, 2016. For the three and nine months ended October 29, 2016 and cumulatively since inception of the initiatives, of the total amounts recorded in the table above, $9.1 million, $42.7 million and $82.6 million relate to our retail segment and the remainder are recorded in shared services.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

As of October 29, 2016, we estimate that cumulative pre-tax restructuring and other charges related to these actions will approximate $114.0 million to $120.0 million, of which approximately $72.0 million to $75.0 million are estimated to be cash expenses.  Included in the estimate of total pre-tax charges are approximately:

 

·

Approximately $50.0 million of lease termination costs;

·

$42.0 million to $45.0 million of inventory and long-lived and intangible asset impairment charges, including accelerated depreciation relating to store closures; and

·

$22.0 million to $25.0 million of consulting, severance and other costs.

 

The following table is a rollforward of amounts included in accrued expenses and other current liabilities in the condensed consolidated balance sheet related to the pre-tax restructuring and other charges (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance and

 

Lease

 

 

 

 

 

 

 

 

 

 

 

 

Employee-

 

Termination

 

Consulting

 

Other

 

 

 

 

 

    

Related Costs

    

Costs

    

Costs

    

Costs

    

Total

 

Beginning Balance, January 30, 2016

 

$

 —

 

$

 —

 

$

918

 

$

858

 

$

1,776

 

Charges, excluding non-cash items

 

 

4,643

 

 

37,004

 

 

13,583

 

 

1,565

 

 

56,795

 

Payments

 

 

(4,179)

 

 

(30,562)

 

 

(13,983)

 

 

(2,398)

 

 

(51,122)

 

Ending Balance, October 29, 2016

 

$

464

 

$

6,442

 

$

518

 

$

25

 

$

7,449

 

 

In addition to the restructuring costs described above, we incurred integration and other costs related to Jos. A. Bank totaling $1.4 million and $5.0 million for the three months ended October 29, 2016 and October 31, 2015, respectively. For the three months ended October 29, 2016, $0.9 million of the integration costs are included in SG&A and $0.5 million are included in cost of sales in the condensed consolidated statement of earnings (loss).  For the three months ended October 31, 2015, $5.2 million of the integration costs are included in SG&A offset by a $0.2 million reduction in in cost of sales in the condensed consolidated statement of earnings (loss). 

 

For the nine months ended October 29, 2016 and October 31, 2015, we incurred integration and other costs related to Jos. A. Bank totaling $7.1 million and $15.9 million, respectively. For the nine months ended October 29, 2016, $5.5 million of the integration costs are included in SG&A and $1.6 million are included in cost of sales in the condensed consolidated statement of earnings (loss).  For the nine months ended October 31, 2015, $15.6 million of the integration costs are included in SG&A and $0.3 million are included in cost of sales in the condensed consolidated statement of earnings (loss). 

 

3.  Earnings (Loss) per Share    

 

Basic earnings (loss) per common share allocated to common shareholders is determined using the two-class method and is computed by dividing net earnings (loss) allocated to common shareholders by the weighted-average common shares outstanding during the period.  Diluted earnings (loss) per common share reflect the more dilutive earnings (loss) per common share amount calculated using the treasury stock method or the two-class method. 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Basic and diluted earnings (loss) per common share allocated to common shareholders are computed using the actual net earnings (loss) allocated to common shareholders and the actual weighted-average common shares outstanding rather than the rounded numbers presented within our condensed consolidated statement of earnings (loss) and the accompanying notes.  As a result, it may not be possible to recalculate earnings (loss) per common share allocated to common shareholders in our condensed consolidated statement of earnings (loss) and the accompanying notes. The following table sets forth the computation of basic and diluted earnings (loss) per common share allocated to common shareholders (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

October 29,

 

October 31,

 

October 29,

 

October 31,

 

 

    

2016

    

2015

    

2016

    

2015

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

28,433

 

$

(27,154)

 

$

55,045

 

$

30,994

 

Net earnings allocated to participating securities (restricted stock and deferred stock units)

 

 

(33)

 

 

 —

 

 

(65)

 

 

(31)

 

Net earnings (loss) allocated to common shareholders

 

$

28,400

 

$

(27,154)

 

$

54,980

 

$

30,963

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted-average common shares outstanding

 

 

48,655

 

 

48,339

 

 

48,570

 

 

48,258

 

Dilutive effect of share-based awards

 

 

157

 

 

 —

 

 

121

 

 

255

 

Diluted weighted-average common shares outstanding

 

 

48,812

 

 

48,339

 

 

48,691

 

 

48,513

 

Net earnings (loss) per common share allocated to common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.58

 

$

(0.56)

 

$

1.13

 

$

0.64

 

Diluted

 

$

0.58

 

$

(0.56)

 

$

1.13

 

$

0.64

 

 

For the three and nine months ended October 29, 2016,  1.9 million and 1.7 million anti-dilutive shares of common stock were excluded from the calculation of diluted earnings (loss) per common share, respectively. For the three and nine months ended October 31, 2015, 0.4 million and 0.3 million anti-dilutive shares of common stock were excluded from the calculation of diluted earnings (loss) per common share, respectively.

 

4.  Debt    

 

On June 18, 2014, The Men's Wearhouse, Inc. entered into a term loan credit agreement that provides for a senior secured term loan in the aggregate principal amount of $1.1 billion (the “Term Loan”) and a $500.0 million asset-based revolving credit agreement (the “ABL Facility”, and together with the Term Loan, the “Credit Facilities”) with certain of our U.S. subsidiaries and Moores the Suit People Inc., one of our Canadian subsidiaries, as co-borrowers. Proceeds from the Term Loan were reduced by an $11.0 million original issue discount (“OID”), which is presented as a reduction of the outstanding balance on the Term Loan on the balance sheet and will be amortized to interest expense over the contractual life of the Term Loan. In addition, on June 18, 2014, The Men’s Wearhouse, Inc. issued $600.0 million in aggregate principal amount of 7.00% Senior Notes due 2022 (the “Senior Notes”).

 

The Credit Facilities and the Senior Notes contain customary non-financial and financial covenants, including fixed charge coverage ratios, total leverage ratios and secured leverage ratios, as well as a restriction on our ability to pay dividends on our common stock in excess of $10.0 million per quarter. Since entering into these financing arrangements and as of October 29, 2016, our total leverage ratio and secured leverage ratio were above the maximums specified in the agreements, which was anticipated when we entered into these arrangements. As a result, we are currently subject to certain additional restrictions, including limitations on our ability to make acquisitions and incur additional indebtedness.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Credit Facilities

 

The Term Loan is guaranteed, jointly and severally, by Tailored Brands, Inc. and certain of our U.S. subsidiaries and will mature on June 18, 2021.  The interest rate on the Term Loan is based on 3-month LIBOR, which was approximately 0.89% at October 29, 2016.    However, the Term Loan interest rate is subject to a LIBOR floor of 1% per annum, plus the applicable margin which is currently 3.50%, resulting in a total interest rate of 4.50%.  In January 2015, we entered into an interest rate swap agreement, in which the variable rate payments due under a portion of the Term Loan were exchanged for a fixed rate (see Note 12).

 

In April 2015, The Men's Wearhouse, Inc. entered into Incremental Facility Agreement No. 1 (the “Incremental Agreement”) resulting in a refinancing of $400.0 million aggregate principal amount of the Term Loan from a variable rate to a fixed rate of 5.0% per annum.  The Incremental Agreement did not impact the total amount borrowed under the Term Loan, the maturity date of the Term Loan of June 18, 2021, or collateral and guarantees under the Term Loan.  In connection with the Incremental Agreement, we incurred deferred financing costs of $3.6 million, which will be amortized over the life of the remaining term using the interest method.  In addition, as a result of entering into the Incremental Agreement, we recorded a loss on extinguishment of debt totaling $12.7 million consisting of the elimination of unamortized deferred financing costs and OID related to the Term Loan, which is included as a separate line in the condensed consolidated statement of earnings (loss).

 

As a result of the interest rate swap and the Incremental Agreement, we have converted a majority of the variable interest rate under the Term Loan to a fixed rate and, as of October 29, 2016, the Term Loan had a weighted average interest rate of 4.89%.  

 

The ABL Facility provides for a senior secured revolving credit facility of $500.0 million, with possible future increases to $650.0 million under an expansion feature that matures on June 18, 2019, and is guaranteed, jointly and severally, by Tailored Brands, Inc. and certain of our U.S. subsidiaries. The ABL Facility has several borrowing and interest rate options including the following indices:  (i) adjusted LIBOR, (ii) Canadian Dollar Offered Rate (“CDOR”) rate, (iii) Canadian prime rate or (iv) an alternate base rate (equal to the greater of the prime rate, the federal funds effective rate plus 0.5% or adjusted LIBOR for a one-month period plus 1.0%). Advances under the ABL Facility bear interest at a rate per annum using the applicable indices plus a varying interest rate margin of up to 2.00%.  The ABL Facility also provides for fees applicable to amounts available to be drawn under outstanding letters of credit which range from 1.50% to 2.00%, and a fee on unused commitments which ranges from 0.25% to 0.375%. As of October 29, 2016, there were no borrowings outstanding under the ABL Facility.  During the three and nine months ended October 29, 2016, the maximum borrowing outstanding under the ABL Facility was $68.5 million.

 

We utilize letters of credit primarily to secure inventory purchases and as collateral for workers compensation claims.  At October 29, 2016, letters of credit totaling approximately $28.9 million were issued and outstanding. Borrowings available under the ABL Facility as of October 29, 2016 were $427.2 million.

 

Senior Notes

 

The Senior Notes are guaranteed, jointly and severally, on an unsecured basis by Tailored Brands, Inc. and certain of our U.S. subsidiaries. The Senior Notes and the related guarantees are senior unsecured obligations of the Company and the guarantors, respectively, and will rank equally with all of the Company's and each guarantor's present and future senior indebtedness. The Senior Notes will mature on July 1, 2022.  Interest on the Senior Notes is payable on January 1 and July 1 of each year. 

 

Long-Term Debt

 

On May 2, 2016, in accordance with the terms of the Credit Facilities, we made a mandatory excess cash flow prepayment of $35.5 million on the Term Loan.  As a result of this prepayment, we recorded a loss on extinguishment of debt totaling $0.9 million consisting of the elimination of unamortized deferred financing costs and OID related to the Term Loan. 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

In addition, during the third quarter of 2016, we repurchased and retired $18.5 million of Senior Notes through open market transactions, which were consummated via borrowings on our ABL Facility.  As a result, we recorded a net gain on extinguishment totaling $1.8 million, which reflects a $2.1 million gain upon repurchase partially offset by the elimination of unamortized deferred financing costs totaling $0.3 million related to the Senior Notes. 

 

For the nine months ended October 29, 2016, as a result of our excess cash flow prepayment and the repurchase and retirement of a total of $25.0 million of Senior Notes, we recorded a net gain on extinguishment totaling $1.7 million, which reflects a $3.1 million gain upon repurchase partially offset by the elimination of unamortized deferred financing costs of $1.4 million, which is included as a separate line in the condensed consolidated statement of earnings (loss).

 

The following table provides details on our long-term debt as of October 29, 2016, October 31, 2015 and January 30, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

October 29,

 

October 31,

 

January 30,

 

 

    

2016

    

2015

    

2016

 

Term Loan (net of unamortized OID of $4.4 million at October 29, 2016, $5.6 million at October 31, 2015 and $5.4 million at January 30, 2016)

 

$

1,044,173

 

$

1,085,392

 

$

1,083,891

 

Senior Notes

 

 

575,000

 

 

600,000

 

 

600,000

 

Less: Deferred financing costs related to the Term Loan and Senior Notes

 

 

(23,300)

 

 

(29,186)

 

 

(27,967)

 

Total long-term debt, net

 

 

1,595,873

 

 

1,656,206

 

 

1,655,924

 

Current portion of long-term debt

 

 

(7,000)

 

 

(7,000)

 

 

(42,451)

 

Total long-term debt, net of current portion

 

$

1,588,873

 

$

1,649,206

 

$

1,613,473

 

 

 

5.  Supplemental Cash Flows    

 

Supplemental disclosure of cash flow information is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended

 

 

 

October 29,

 

October 31,

 

 

    

2016

    

2015

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

62,450

 

$

61,895

 

Cash (refunded) paid for income taxes, net

 

$

(44,961)

 

$

32,932

 

 

 

 

 

 

 

 

 

Schedule of noncash investing and financing activities:

 

 

 

 

 

 

 

Cash dividends declared

 

$

9,572

 

$

9,028

 

 

We had unpaid capital expenditure purchases included in accounts payable and accrued expenses and other current liabilities of approximately $7.8 million and $7.3 million at October 29, 2016 and October 31, 2015, respectively.  Capital expenditure purchases are recorded as cash outflows from investing activities in the condensed consolidated statement of cash flows in the period they are paid.

 

6.  Inventories    

 

The following table provides details on our inventories as of October 29, 2016, October 31, 2015 and January 30, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 29,

 

October 31,

 

January 30,

 

 

    

2016

    

2015

    

2016

 

Finished goods

 

$

963,036

 

$

1,006,182

 

$

919,623

 

Raw materials and merchandise components

 

 

84,879

 

 

54,065

 

 

102,881

 

Total inventories

 

$

1,047,915

 

$

1,060,247

 

$

1,022,504

 

 

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TAILORED BRANDS, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

7.  Income Taxes 

 

Our effective income tax rate increased to 24.1% for the third quarter of 2016 from a benefit of (56.8)% for the third quarter of 2015 primarily as a result of the Jos. A. Bank tradename impairment charge of $90.1 million in last year’s third quarter, which generated a book loss in our U.S. entities and significantly impacted our effective tax rate.  In addition, the effective tax rate for the third quarter of 2016 is impacted by lower U.S. income as compared to income earned in foreign jurisdictions, which have lower statutory tax rates.

 

Our effective income tax rate increased to 27.3% for the first nine months of 2016 from a benefit of (24.0)% for the first nine months of 2015 primarily due to the impact of the aforementioned Jos. A. Bank tradename impairment charge, which resulted in our effective tax rate being a benefit for the first nine months of 2015.  In addition, the effective tax rate for the first nine months of 2016 is impacted by lower U.S. income as compared to income earned in foreign jurisdictions, which have lower statutory tax rates.

 

Lastly, we are currently undergoing several federal, foreign and state audits which we are vigorously defending and currently do not believe should result in any material change to tax expense.

 

8.  Other Current Assets, Accrued Expenses and Other Current Liabilities and Deferred Taxes and Other Liabilities    

 

Other current assets consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 29,

 

October 31,

 

January 30,

 

 

    

2016

    

2015

    

2016

 

Prepaid expenses

 

$

39,935

 

$

42,824

 

$

42,166

 

Tax receivable

 

 

4,697

 

 

69,830

 

 

85,153

 

Current deferred tax assets

 

 

 —

 

 

38,736

 

 

 —

 

Other

 

 

15,558

 

 

16,681

 

 

16,227

 

Total other current assets

 

$

60,190

 

$

168,071

 

$

143,546

 

 

Accrued expenses and other current liabilities consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

October 29,

    

October 31,

    

January 30,

 

 

 

2016

 

2015

 

2016

 

Accrued salary, bonus, sabbatical, vacation and other benefits

 

$

70,631

 

$

71,921

 

$

75,373

 

Sales, value added, payroll, property and other taxes payable

 

 

36,021

 

 

35,486

 

 

27,505

 

Unredeemed gift certificates

 

 

34,693

 

 

34,477

 

 

40,884

 

Accrued workers compensation and medical costs

 

 

30,818

 

 

28,408

 

 

30,877

 

Customer deposits, prepayments and refunds payable

 

 

29,371

 

 

25,715

 

 

25,218

 

Accrued interest

 

 

25,884

 

 

27,207

 

 

16,282

 

Loyalty program reward certificates

 

 

10,704

 

 

8,181

 

 

9,215

 

Cash dividends declared

 

 

9,572

 

 

9,028

 

 

9,150

 

Accrued royalties

 

 

7,977

 

 

6,630

 

 

3,727

 

Lease termination and other store closure costs

 

 

6,442

 

 

92

 

 

 —

 

Other

 

 

18,545

 

 

18,848

 

 

18,531

 

Total accrued expenses and other current liabilities

 

$

280,658

 

$

265,993

 

$

256,762

 

 

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TAILORED BRANDS, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Deferred taxes and other liabilities consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 29,

    

October 31,

 

January 30,

 

 

    

2016

    

2015

    

2016

 

Deferred and other income tax liabilities

 

$

102,243

 

$

275,213

 

$

112,469

 

Deferred rent and landlord incentives

 

 

61,641

 

 

65,764

 

 

66,075

 

Unfavorable lease liabilities

 

 

5,394

 

 

9,129

 

 

8,279

 

Other

 

 

5,901

 

 

7,953

 

 

7,782

 

Total deferred taxes and other liabilities

 

$

175,179

 

$

358,059

 

$

194,605

 

 

 

9.  Accumulated Other Comprehensive (Loss) Income    

 

The following table summarizes the components of accumulated other comprehensive (loss) income for the nine months ended October 29, 2016 (in thousands and net of tax):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

 

 

 

 

 

 

Currency

 

Cash Flow

 

Pension

 

 

 

 

 

    

Translation

    

Hedges

    

Plan

    

Total

 

BALANCE— January 30, 2016

 

$

(26,659)

 

$

(2,007)

 

$

180

 

$

(28,486)

 

Other comprehensive (loss) income before reclassifications

 

 

(18,246)

 

 

354

 

 

 —

 

 

(17,892)

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

1,040

 

 

 —

 

 

1,040

 

Net other comprehensive (loss) income

 

 

(18,246)