Table of Contents

 

 

 

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 May 3, 2014 or

 

o         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

 

THE MEN’S WEARHOUSE, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Texas

 

74-1790172

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification Number)

 

 

 

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 x. No o.

 

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 x. No o.

 

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   x

 

Accelerated filer  o

 

 

 

Non-accelerated filer   o

(Do not check if a smaller reporting company)

Smaller reporting company o

 

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

 

The number of shares of common stock of the Registrant, par value $.01 per share, outstanding at May 30, 2014 was 47,965,802 excluding 137,900 shares classified as Treasury Stock.

 

 

 



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 May 3, 2014, May 4, 2013, and February 1, 2014

 

2

 

 

 

Condensed Consolidated Statements of Earnings for the Quarter Ended May 3, 2014 and May 4, 2013

 

3

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Quarter Ended May 3, 2014 and May 4, 2013

 

4

 

 

 

Condensed Consolidated Statements of Cash Flows for the Quarter Ended May 3, 2014 and May 4, 2013

 

5

 

 

 

Notes to Condensed Consolidated Financial Statements

 

6

 

 

 

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

 

19

 

 

 

Item 3 — Quantitative and Qualitative Disclosures about Market Risk

 

27

 

 

 

Item 4 — Controls and Procedures

 

27

 

 

 

PART II — Other Information

 

 

 

 

 

Item 1 — Legal Proceedings

 

27

 

 

 

Item 1A — Risk Factors

 

27

 

 

 

Item 2— Unregistered Sales of Equity Securities and Use of Proceeds

 

28

 

 

 

Item 6 — Exhibits

 

29

 

 

 

SIGNATURES

 

30

 



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.  These forward-looking statements may include, but are not limited to, references to, sales, earnings, margins, costs, number and costs of store openings, future capital expenditures, 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 economic activity and inflation; success, or lack thereof, in executing our internal operating plans and new store and new market expansion plans, including integration of acquisitions; performance issues with key suppliers; disruption in buying trends due to homeland security concerns; severe weather; foreign currency fluctuations; government export and import policies; aggressive advertising or marketing activities of competitors; and legal proceedings.  Future results will also be dependent upon our ability to continue to identify and complete successful expansions and penetrations into existing and new markets and our ability to integrate such expansions with our existing operations.  These 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 February 1, 2014 for a more complete discussion of these and other factors that might affect our performance and financial results. These 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 statement, whether as a result of new information, future events or otherwise.

 

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Table of Contents

 

THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

 

 

May 3,
2014

 

May 4,
2013

 

February 1,
2014

 

ASSETS

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

95,923

 

$

155,099

 

$

59,252

 

Accounts receivable, net

 

67,778

 

64,468

 

63,153

 

Inventories

 

645,772

 

598,916

 

599,486

 

Other current assets

 

84,803

 

66,544

 

93,206

 

 

 

 

 

 

 

 

 

Total current assets

 

894,276

 

885,027

 

815,097

 

 

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT, net

 

406,784

 

390,077

 

408,162

 

 

 

 

 

 

 

 

 

TUXEDO RENTAL PRODUCT, net

 

148,120

 

144,089

 

142,816

 

GOODWILL

 

127,098

 

87,313

 

126,003

 

INTANGIBLE ASSETS, net

 

57,966

 

31,357

 

58,027

 

OTHER ASSETS

 

6,734

 

6,318

 

5,125

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

1,640,978

 

$

1,544,181

 

$

1,555,230

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Accounts payable

 

$

168,826

 

$

161,533

 

$

148,762

 

Accrued expenses and other current liabilities

 

220,452

 

185,133

 

175,797

 

Income taxes payable

 

4,277

 

6,366

 

730

 

Current maturities of long-term debt

 

10,000

 

 

10,000

 

 

 

 

 

 

 

 

 

Total current liabilities

 

403,555

 

353,032

 

335,289

 

 

 

 

 

 

 

 

 

LONG-TERM DEBT

 

85,000

 

 

87,500

 

DEFERRED TAXES AND OTHER LIABILITIES

 

109,696

 

92,099

 

109,292

 

 

 

 

 

 

 

 

 

Total liabilities

 

598,251

 

445,131

 

532,081

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EQUITY:

 

 

 

 

 

 

 

Preferred stock

 

 

 

 

Common stock

 

480

 

728

 

476

 

Capital in excess of par

 

417,622

 

388,497

 

412,043

 

Retained earnings

 

580,373

 

1,214,087

 

572,712

 

Accumulated other comprehensive income

 

33,302

 

33,824

 

27,311

 

Treasury stock, at cost

 

(3,407

)

(550,815

)

(3,407

)

 

 

 

 

 

 

 

 

Total equity attributable to common shareholders

 

1,028,370

 

1,086,321

 

1,009,135

 

 

 

 

 

 

 

 

 

Non-controlling interest

 

14,357

 

12,729

 

14,014

 

 

 

 

 

 

 

 

 

Total equity

 

1,042,727

 

1,099,050

 

1,023,149

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

1,640,978

 

$

1,544,181

 

$

1,555,230

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

 

THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share data)

(Unaudited)

 

 

 

For the Quarter Ended

 

 

 

May 3,
2014

 

May 4,
2013

 

Net sales:

 

 

 

 

 

Retail clothing product

 

$

433,024

 

$

423,737

 

Tuxedo rental services

 

101,663

 

98,482

 

Alteration and other services

 

38,962

 

37,962

 

Total retail sales

 

573,649

 

560,181

 

Corporate apparel clothing product sales

 

56,825

 

56,355

 

Total net sales

 

630,474

 

616,536

 

 

 

 

 

 

 

Cost of sales:

 

 

 

 

 

Retail clothing product

 

191,477

 

185,483

 

Tuxedo rental services

 

15,317

 

14,498

 

Alteration and other services

 

27,722

 

28,418

 

Occupancy costs

 

72,847

 

71,274

 

Total retail cost of sales

 

307,363

 

299,673

 

Corporate apparel clothing product cost of sales

 

39,747

 

38,943

 

Total cost of sales

 

347,110

 

338,616

 

 

 

 

 

 

 

Gross margin:

 

 

 

 

 

Retail clothing product

 

241,547

 

238,254

 

Tuxedo rental services

 

86,346

 

83,984

 

Alteration and other services

 

11,240

 

9,544

 

Occupancy costs

 

(72,847

)

(71,274

)

Total retail gross margin

 

266,286

 

260,508

 

Corporate apparel clothing product gross margin

 

17,078

 

17,412

 

Total gross margin

 

283,364

 

277,920

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

256,083

 

225,367

 

 

 

 

 

 

 

Operating income

 

27,281

 

52,553

 

 

 

 

 

 

 

Interest income

 

61

 

121

 

Interest expense

 

(1,135

)

(344

)

Earnings before income taxes

 

26,207

 

52,330

 

Provision for income taxes

 

9,749

 

19,374

 

Net earnings including non-controlling interest

 

16,458

 

32,956

 

Net loss attributable to non-controlling interest

 

28

 

135

 

 

 

 

 

 

 

Net earnings attributable to common shareholders

 

$

16,486

 

$

33,091

 

 

 

 

 

 

 

Net earnings per common share attributable to common shareholders:

 

 

 

 

 

Basic

 

$

0.34

 

$

0.65

 

Diluted

 

$

0.34

 

$

0.65

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

Basic

 

47,607

 

50,607

 

Diluted

 

47,974

 

50,788

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.18

 

$

0.18

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

For the Quarter Ended

 

 

 

May 3,
2014

 

May 4,
2013

 

 

 

 

 

 

 

Net earnings including non-controlling interest

 

$

16,458

 

$

32,956

 

 

 

 

 

 

 

Currency translation adjustments

 

6,180

 

(3,216

)

 

 

 

 

 

 

Unrealized gain on cash flow hedge, net of tax

 

182

 

 

 

 

 

 

 

 

Comprehensive income including non-controlling interest

 

22,820

 

29,740

 

 

 

 

 

 

 

Comprehensive (income) loss attributable to non-controlling interest:

 

 

 

 

 

Net loss

 

28

 

135

 

Currency translation adjustments

 

(371

)

116

 

 

 

 

 

 

 

Amounts attributable to non-controlling interest

 

(343

)

251

 

 

 

 

 

 

 

Comprehensive income attributable to common shareholders

 

$

22,477

 

$

29,991

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

For the Quarter Ended

 

 

 

May 3,
2014

 

May 4,
2013

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net earnings including non-controlling interest

 

$

16,458

 

$

32,956

 

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

 

 

 

 

 

Depreciation and amortization

 

21,929

 

21,355

 

Tuxedo rental product amortization

 

7,497

 

7,328

 

Loss on disposition of assets

 

1,357

 

412

 

Asset impairment charge

 

302

 

 

Share-based compensation

 

3,974

 

4,498

 

Excess tax benefits from share-based plans

 

(3,002

)

(199

)

Deferred tax (benefit) provision

 

(4,326

)

4,455

 

Deferred rent expense and other

 

75

 

1,173

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(3,586

)

(1,846

)

Inventories

 

(43,195

)

(43,710

)

Tuxedo rental product

 

(12,495

)

(24,787

)

Other assets

 

13,085

 

7,666

 

Accounts payable, accrued expenses and other current liabilities

 

65,288

 

61,381

 

Income taxes payable

 

6,547

 

294

 

Other liabilities

 

(95

)

(310

)

 

 

 

 

 

 

Net cash provided by operating activities

 

69,813

 

70,666

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(22,543

)

(25,127

)

Proceeds from sales of property and equipment

 

 

38

 

 

 

 

 

 

 

Net cash used in investing activities

 

(22,543

)

(25,089

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from issuance of common stock

 

4,373

 

1,359

 

Payments on term loan

 

(2,500

)

 

Deferred financing costs

 

(1,389

)

(1,771

)

Cash dividends paid

 

(8,812

)

(9,263

)

Tax payments related to vested deferred stock units

 

(5,732

)

(3,310

)

Excess tax benefits from share-based plans

 

3,002

 

199

 

Repurchases of common stock

 

(251

)

(33,009

)

 

 

 

 

 

 

Net cash used in financing activities

 

(11,309

)

(45,795

)

 

 

 

 

 

 

Effect of exchange rate changes

 

710

 

(746

)

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

36,671

 

(964

)

Balance at beginning of period

 

59,252

 

156,063

 

 

 

 

 

 

 

Balance at end of period

 

$

95,923

 

$

155,099

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

 

THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.  Significant Accounting Policies

 

Basis of Presentation — The condensed 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.  We believe that 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.

 

Our business historically has been seasonal in nature, and 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 February 1, 2014.

 

Unless the context otherwise requires, “Company”, “we”, “us” and “our” refer to The Men’s Wearhouse, 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.”) requires management to make estimates and assumptions that affect the reported amounts and related disclosures.  Actual amounts could differ from those estimates.

 

On August 6, 2013, we acquired JA Holding, Inc. (“JA Holding”), the parent company of the American clothing brand Joseph Abboud® and a U.S. tailored clothing factory.  Based on the manner in which we manage, evaluate and internally report our operations, we determined that JA Holding is a component of our Men’s Wearhouse brand and therefore has been included in our retail reportable segment.  See Note 12 for additional details on our segments.

 

The results of operations for JA Holding are included in the consolidated statements of earnings beginning on August 6, 2013 and were not significant to our consolidated results.  The impact of the acquisition on our results of operations, as if the acquisition had been completed as of February 3, 2013 is not significant.

 

Recent Accounting Pronouncements — We have considered all new accounting pronouncements and have concluded that 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 April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Reporting Discontinued Operations and Disposals of Components of an Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements.  The new guidance is effective for annual and interim periods beginning after December 15, 2014, with early adoption permitted.  The new guidance will be applicable for disposal transactions, if any, that we initiate after the adoption date.  The adoption of this guidance is not expected to have a material impact on our financial position, results of operations or cash flows.

 

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.  The new guidance is effective for annual and interim periods beginning after December 15, 2016 with no early adoption permitted.  We are currently evaluating the impact, if any, the adoption of this guidance will have on our financial position, results of operations or cash flows.

 

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Table of Contents

 

THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

2.  Earnings per Share

 

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

 

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

 

 

 

For the Quarter Ended

 

 

 

May 3,
2014

 

May 4,
 2013

 

 

 

 

 

 

 

Numerator

 

 

 

 

 

Total net earnings attributable to common shareholders

 

$

16,486

 

$

33,091

 

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

 

(65

)

(312

)

Net earnings attributable to common shareholders

 

$

16,421

 

$

32,779

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

Basic weighted-average common shares outstanding

 

47,607

 

50,607

 

Dilutive effect of share-based awards

 

367

 

181

 

Diluted weighted-average common shares outstanding

 

47,974

 

50,788

 

Net earnings per common share attributable to common shareholders:

 

 

 

 

 

Basic

 

$

0.34

 

$

0.65

 

Diluted

 

$

0.34

 

$

0.65

 

 

For the quarters ended May 3, 2014 and May 4, 2013, 0.1 million and 0.3 million anti-dilutive shares of common stock were excluded from the calculation of diluted earnings per common share attributable to common shareholders, respectively.

 

3.  Debt

 

On April 12, 2013, we entered into a Third Amended and Restated Credit Agreement (as amended, the “Credit Agreement”).  The Credit Agreement provides for a senior revolving credit facility of $300.0 million, with possible future increases to $450.0 million under an expansion feature and matures on April 12, 2018.  As of May 3, 2014, there were no borrowings outstanding under the senior revolving credit facility.

 

On August 6, 2013, we borrowed $100.0 million under the term loan (the “Term Loan”) provision of our Credit Agreement which will be repaid over five years, with 10% payable annually in quarterly installments and the remainder due at maturity.  The interest rate on the Term Loan is based on the monthly LIBOR rate plus 1.75%.  In conjunction with the Term Loan, we also entered into an interest rate swap in which the variable rate payments due under the Term Loan were exchanged for a fixed rate of 1.27%, resulting in a combined interest rate of 3.02%.  See Note 11 for additional details on the interest rate swap.  As of May 3, 2014, there was $95.0 million outstanding under the Term Loan.

 

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THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

We utilize letters of credit primarily to secure inventory purchases and as collateral for workers compensation claims.  At May 3, 2014, letters of credit totaling approximately $21.6 million were issued and outstanding.   Borrowings available under our Credit Agreement at May 3, 2014 were $278.4 million.

 

4.  Supplemental Cash Flows

 

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

 

 

 

For the Quarter Ended

 

 

 

May 3,
2014

 

May 4,
2013

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,026

 

$

199

 

Cash (refunded) paid for income taxes, net

 

$

(6,308

)

$

9,795

 

 

 

 

 

 

 

Schedule of noncash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared

 

$

8,725

 

$

9,247

 

 

We had unpaid capital expenditure purchases included in accounts payable and accrued expenses and other current liabilities of approximately $8.0 million and $11.5 million at May 3, 2014 and May 4, 2013, respectively.  Capital expenditure purchases are recorded as cash outflows from investing activities in the condensed consolidated statement of cash flows in the period in which they are paid.

 

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

 

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

 

 

 

May 3,
2014

 

May 4,
2013

 

February 1,
2014

 

 

 

 

 

 

 

 

 

Prepaid expenses

 

$

35,782

 

$

34,464

 

$

33,747

 

Current deferred tax assets

 

38,536

 

21,200

 

33,148

 

Tax receivable

 

3,039

 

3,169

 

17,276

 

Other

 

7,446

 

7,711

 

9,035

 

Total other current assets

 

$

84,803

 

$

66,544

 

$

93,206

 

 

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

 

 

 

May 3,
2014

 

May 4,
2013

 

February 1,
2014

 

Customer deposits, prepayments and refunds payable

 

$

58,955

 

$

50,667

 

$

22,617

 

Accrued salary, bonus, sabbatical, vacation and other benefits

 

47,181

 

42,846

 

58,127

 

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

 

25,313

 

26,981

 

19,184

 

Accrued strategic professional fees

 

24,605

 

 

9,338

 

Accrued workers compensation and medical costs

 

21,862

 

19,294

 

22,055

 

Unredeemed gift certificates

 

14,242

 

14,069

 

15,589

 

Cash dividends declared

 

8,725

 

9,247

 

8,963

 

Loyalty program reward certificates

 

6,433

 

7,178

 

6,321

 

Other

 

13,136

 

14,851

 

13,603

 

Total accrued expenses and other current liabilities

 

$

220,452

 

$

185,133

 

$

175,797

 

 

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

 

 

 

May 3,
2014

 

May 4,
2013

 

February 1,
2014

 

Deferred rent and landlord incentives

 

$

55,948

 

$

53,501

 

$

55,923

 

Non-current deferred and other income tax liabilities

 

52,381

 

37,440

 

51,604

 

Other

 

1,367

 

1,158

 

1,765

 

Total deferred taxes and other liabilities

 

$

109,696

 

$

92,099

 

$

109,292

 

 

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THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

6.  Accumulated Other Comprehensive Income

 

The following table summarizes the components of accumulated other comprehensive income for the quarter ended May 3, 2014 (in thousands and net of tax):

 

 

 

Foreign
Currency
Translation

 

Interest Rate
Swap

 

Total

 

BALANCE — February 1, 2014

 

$

27,710

 

$

(399

)

$

27,311

 

 

 

 

 

 

 

 

 

Other comprehensive income before reclassifications

 

6,180

 

19

 

6,199

 

Other comprehensive income attributable to non-controlling interest

 

(371

)

 

(371

)

Amounts reclassified from accumulated other comprehensive income

 

 

163

 

163

 

Net current-period other comprehensive income

 

5,809

 

182

 

5,991

 

 

 

 

 

 

 

 

 

BALANCE — May 3, 2014

 

$

33,519

 

$

(217

)

$

33,302

 

 

Amounts reclassified from other comprehensive income related to our interest rate swap were recorded within interest expense in the condensed consolidated statement of earnings for the quarter ended May 3, 2014.  There were no reclassifications from other comprehensive income for the quarter ended May 4, 2013.

 

7.  Share Repurchases

 

In March 2013, our Board of Directors (the “Board”) approved a $200.0 million share repurchase program for our common stock.  At May 3, 2014, the remaining balance available under the Board’s March 2013 authorization was $48.0 million.

 

During the first quarter of 2014, no shares were repurchased in open market transactions under the Board’s March 2013 authorization.  During the first quarter of 2013, 989,182 shares at a cost of $32.8 million were repurchased in open market transactions at an average price per share of $33.21 under the Board’s March 2013 authorization.

 

8.  Share-Based Compensation Plans

 

For a discussion of our share-based compensation plans refer to Note 10 in our Annual Report on Form 10-K for the fiscal year ended February 1, 2014.

 

We account for share-based awards in accordance with the authoritative guidance regarding share-based payments, which requires the compensation cost resulting from all share-based payment transactions be recognized in the financial statements. The amount of compensation cost is measured based on the grant-date fair value of the instrument issued and is recognized over the vesting period.  Share-based compensation expense recognized for the quarters ended May 3, 2014 and May 4, 2013 was $4.0 million and $4.5 million, respectively.

 

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THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Non-Vested Deferred Stock Units and Restricted Stock Shares

 

The following table summarizes the activity of time-based and performance-based deferred stock units (“DSUs”) for the quarter ended May 3, 2014:

 

 

 

Shares

 

Weighted-Average
Grant-Date
 Fair Value

 

 

 

Time-
Based

 

Performance-
Based

 

Time-
Based

 

Performance-
Based

 

Non-Vested at February 1, 2014

 

573,042

 

82,558

 

$

32.95

 

$

33.09

 

Granted

 

217,385

 

18,789

 

47.26

 

47.26

 

Vested (1) 

 

(360,899

)

(1,134

)

33.19

 

33.09

 

Forfeited

 

(18,069

)

 

34.99

 

 

Non-Vested at May 3, 2014

 

411,459

 

100,213

 

$

40.21

 

$

35.75

 

 


(1)             Includes 119,468 shares relinquished for tax payments related to vested DSUs for the quarter ended May 3, 2014.

 

On April 3, 2013, our Board approved a change in the form of award agreements to be issued for grants of DSUs to participants under our 2004 Long-Term Incentive Plan.  As revised, the award agreements provide that dividend equivalents, if any, will be accrued during the vesting period for such DSU awards and paid out only upon vesting of the underlying DSUs.  As such, grants of DSU awards on or after April 3, 2013 earn dividends throughout the vesting period which are subject to the same vesting terms as the underlying share award.  Grants of DSUs generally vest over a period from one to three years.  DSU awards granted prior to April 3, 2013 are entitled to receive non-forfeitable dividend equivalents, if any, when and if paid to shareholders of record at the payment date.  Included in the non-vested time-based awards as of May 3, 2014 are 89,471 DSUs granted prior to April 3, 2013.

 

Performance-based DSUs granted in 2014 (“2014 performance-based DSUs”) represent a contingent right to receive one share of common stock and vest over a one year period, subject to our achievement of a performance target for 2014.  Any 2014 performance-based DSUs that are unvested at the end of the one year period will lapse and be forfeited as of such time.  The 2014 performance-based DSUs earn dividends throughout the vesting period and are subject to the same vesting terms as the underlying performance-based awards.

 

Performance-based DSUs granted in 2013 (“2013 performance-based DSUs”) represent a contingent right to receive one share of common stock and generally vest in one-third tranches over a three year period, subject to our achievement of a performance target during an applicable performance period.  Any unvested 2013 performance-based DSUs at the end of the performance period are rolled over and become eligible to vest in subsequent performance periods.  Any 2013 performance-based DSUs that are unvested at the end of all vesting periods will lapse and be forfeited as of such time.  The 2013 performance-based DSUs earn dividends throughout the vesting period and are subject to the same vesting terms as the underlying performance-based awards.

 

The following table summarizes the activity of restricted stock for the quarter ended May 3, 2014:

 

 

 

Shares

 

Weighted-
Average
Grant-Date
Fair Value

 

Non-Vested at February 1, 2014

 

80,919

 

$

31.36

 

Granted

 

4,184

 

47.81

 

Vested

 

(23,788

)

28.91

 

Forfeited

 

 

 

Non-Vested at May 3, 2014

 

61,315

 

$

33.44

 

 

Restricted stock awards receive non-forfeitable dividends, if any, when and if paid to shareholders of record at the payment date.

 

As of May 3, 2014, we have unrecognized compensation expense related to non-vested DSUs and shares of restricted stock of approximately $16.4 million, which is expected to be recognized over a weighted-average period of 1.3 years.

 

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THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Stock Options

 

The following table summarizes the activity of stock options for the quarter ended May 3, 2014:

 

 

 

Shares

 

Weighted-
Average
Exercise
Price

 

Outstanding at February 1, 2014

 

645,990

 

$

28.80

 

Granted

 

110,576

 

47.26

 

Exercised

 

(137,468

)

25.51

 

Forfeited

 

(60,000

)

17.18

 

Outstanding at May 3, 2014

 

559,098

 

$

34.51

 

Exercisable at May 3, 2014

 

284,734

 

$

31.32

 

 

The weighted-average grant date fair value of the 110,576 stock options granted during the quarter ended May 3, 2014 was $16.41 per share.  The following table summarizes the weighted-average assumptions used to fair value stock options at the date of grant using the Black-Scholes option pricing model for the quarter ended May 3, 2014.

 

 

 

For the Quarter
Ended

 

 

 

May 3,
2014

 

 

 

 

 

Risk-free interest rate

 

1.75%

 

Expected lives

 

5.0 years

 

Dividend yield

 

1.80%

 

Expected volatility

 

44.43%

 

 

As of May 3, 2014, we have unrecognized compensation expense related to non-vested stock options of approximately $3.5 million which is expected to be recognized over a weighted-average period of 2.0 years.

 

Employee Stock Discount Plan

 

The Employee Stock Discount Plan (“ESDP”) allows employees to authorize after-tax payroll deductions to be used for the purchase of up to 2,137,500 shares of our common stock at 85% of the lesser of the fair market value on the first day of the offering period or the fair market value on the last day of the offering period.  During the quarter ended May 3, 2014, employees purchased 20,505 shares under the ESDP, which had a weighted-average share price of $42.23 per share.  As of May 3, 2014, 719,833 shares were reserved for future issuance under the ESDP.

 

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THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

9.  Goodwill and Other Intangible Assets

 

Goodwill

 

Goodwill allocated to our reportable segments and changes in the net carrying amount of goodwill for the quarter ended May 3, 2014 are as follows (in thousands):

 

 

 

Retail

 

Corporate
Apparel

 

Total

 

Balance at February 1, 2014

 

$

96,919

 

$

29,084

 

$

126,003

 

Translation adjustment

 

359

 

736

 

1,095

 

Balance at May 3, 2014

 

$

97,278

 

$

29,820

 

$

127,098

 

 

Goodwill is evaluated for impairment annually as of our fiscal year end.  A more frequent evaluation is performed if events or circumstances indicate that impairment could have occurred.  Such events or circumstances could include, but are not limited to, new significant negative industry or economic trends, unanticipated changes in the competitive environment, decisions to significantly modify or dispose of operations and a significant sustained decline in the market price of our stock.  No additional impairment evaluation was considered necessary during the first quarter of fiscal 2014.

 

Intangible Assets

 

The gross carrying amount and accumulated amortization of our identifiable intangible assets are as follows (in thousands):

 

 

 

May 3,
2014

 

May 4,
2013

 

February 1,
2014

 

 

 

 

 

 

 

 

 

Amortizable intangible assets:

 

 

 

 

 

 

 

Carrying amount:

 

 

 

 

 

 

 

Trademarks, tradenames, and other intangibles

 

$

12,096

 

$

14,477

 

$

12,012

 

Customer relationships

 

34,492

 

31,818

 

33,602

 

Total carrying amount

 

46,588

 

46,295

 

45,614

 

Accumulated amortization:

 

 

 

 

 

 

 

Trademarks, tradenames, and other intangibles

 

(9,090

)

(8,821

)

(9,007

)

Customer relationships

 

(10,882

)

(7,362

)

(9,895

)

Total accumulated amortization

 

(19,972

)

(16,183

)

(18,902

)

Total amortizable intangible assets, net

 

26,616

 

30,112

 

26,712

 

Indefinite-lived intangible assets:

 

 

 

 

 

 

 

Trademarks and tradename

 

31,350

 

1,245

 

31,315

 

Total intangible assets, net

 

$

57,966

 

$

31,357

 

$

58,027

 

 

The increase in indefinite-lived intangible assets at February 1, 2014 relates to the Joseph Abboud tradename acquired in our acquisition of JA Holding.

 

The pretax amortization expense associated with intangible assets subject to amortization totaled approximately $0.8 million for the quarters ended May 3, 2014 and May 4, 2013, respectively, and approximately $3.8 million for the year ended February 1, 2014.  Pretax amortization associated with intangible assets subject to amortization at May 3, 2014 is estimated to be $2.3 million for the remainder of fiscal year 2014, $3.1 million for each of the fiscal years 2015, 2016 and 2017 and $3.0 million for fiscal year 2018.

 

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THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

10.  Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The authoritative guidance for fair value measurements establishes a three-tier fair value hierarchy, categorizing the inputs used to measure fair value.  The hierarchy can be described as follows:  Level 1- observable inputs such as quoted prices in active markets; Level 2- inputs other than the quoted prices in active markets that are observable either directly or indirectly; and Level 3- unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.  The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

There were no transfers into or out of Level 1 and Level 2 during the quarter ended May 3, 2014 or May 4, 2013, respectively, or during the year ended February 1, 2014.

 

Assets and Liabilities that are Measured at Fair Value on a Recurring Basis

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

(in thousands)

 

Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total

 

At May 3, 2014-

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

$

820

 

$

 

$

820

 

 

 

 

 

 

 

 

 

 

 

At February 1, 2014-

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

$

1,137

 

$

 

$

1,137

 

 

 

 

 

 

 

 

 

 

 

At May 4, 2013-

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

20,059

 

$

 

$

 

$

20,059

 

Derivative financial instruments

 

$

 

$

138

 

$

 

$

138

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

$

11

 

$

 

$

11

 

 

Cash equivalents consist of money market instruments that have original maturities of three months or less.  The carrying value of cash equivalents approximates fair value due to the highly liquid and short-term nature of these instruments.

 

Derivative financial instruments are comprised of (1) foreign currency forward exchange contracts primarily entered into to minimize our foreign currency exposure related to forecasted purchases of certain inventories denominated in a currency different from the operating entity’s functional currency and (2) an interest rate swap agreement to minimize our exposure to interest rate changes on our outstanding indebtedness.  These derivative financial instruments are recorded in the condensed consolidated balance sheets at fair value based upon observable market inputs.  Derivative financial instruments in an asset position are included within other current assets in the condensed consolidated balance sheets.  Derivative financial instruments in a liability position are included within accrued expenses and other current liabilities or noncurrent liabilities in the condensed consolidated balance sheets.  Refer to Note 11 for further information regarding our derivative instruments.

 

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THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Assets and Liabilities that are Measured at Fair Value on a Non-Recurring Basis

 

Long-lived assets, such as property and equipment and identifiable intangibles with finite useful lives, are periodically evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  If the asset carrying amount exceeds its fair value, an impairment charge is recognized in the amount by which the carrying amount exceeds the fair value of the asset.  The fair values of long-lived assets held-for-use are based on our own judgments about the assumptions that market participants would use in pricing the asset and on observable market data, when available.  We classify these measurements as Level 3 within the fair value hierarchy.   For the three months ended May 3, 2014, we recorded charges for the impairment of long-lived assets for store assets of $0.3 million which is included within selling, general and administrative expenses in our condensed consolidated statement of earnings.  The asset impairment charges reduced the carrying amounts of the applicable long-lived assets, primarily leasehold improvements for store assets, to their fair values of zero as of May 3, 2014.  No impairment charges were recorded for the three months ended May 4, 2013.

 

Fair Value of Financial Instruments

 

Our financial instruments, other than those presented in the disclosures above, consist of cash, accounts receivable, accounts payable and accrued expenses, long-term debt and other current liabilities.  Management estimates that, as of May 3, 2014, May 4, 2013 and February 1, 2014, the carrying value of cash, accounts receivable, accounts payable and accrued expenses, and other current liabilities approximate their fair value due to the highly liquid or short-term nature of these instruments.

 

In addition, as of May 3, 2014, based upon observable market data provided by a third party, which we consider a Level 2 input within the fair value hierarchy, the carrying value of our long-term debt approximates its fair value.

 

11.  Derivative Financial Instruments

 

We are exposed to market risk associated with foreign currency exchange rate fluctuations as a result of our direct sourcing programs and our operations in foreign countries.  In connection with our direct sourcing programs, we may enter into merchandise purchase commitments that are denominated in a currency different from the functional currency of the operating entity.  Our risk management policy is to hedge a significant portion of forecasted merchandise purchases for our direct sourcing programs that bear foreign exchange risk using foreign exchange forward contracts.  We have not elected to apply hedge accounting to these transactions denominated in a foreign currency.  These foreign currency derivative financial instruments are recorded in the condensed consolidated balance sheet at fair value determined by comparing the cost of the foreign currency to be purchased under the contracts using the exchange rates obtained under the contracts (adjusted for forward points) to the hypothetical cost using the spot rate at period end.

 

In addition, we are exposed to interest rate risk associated with our outstanding indebtedness.  In connection with this indebtedness, we entered into an interest rate swap in which the variable rate payments due under our Term Loan were exchanged for a fixed rate.  Our risk management policy is to hedge our exposure to fluctuations in interest rates using this swap agreement.  The interest rate swap derivative financial instrument is recorded in the condensed consolidated balance sheet at fair value which approximates the amount at which the swap could be settled using projected future interest rates as provided by counterparties.

 

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THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The tables below disclose the fair value of the derivative financial instruments included in the condensed consolidated balance sheets as of May 3, 2014, February 1, 2014 and May 4, 2013 (in thousands):

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

Balance Sheet
Location

 

Fair Value

 

Balance Sheet
Location

 

Fair Value

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

At May 3, 2014-
Foreign exchange forward contracts

 

Other current assets

 

$

 

Accrued expenses and other current liabilities

 

$

464

 

At February 1, 2014-
Foreign exchange forward contracts

 

Other current assets

 

$

 

Accrued expenses and other current liabilities

 

$

483

 

At May 4, 2013-
Foreign exchange forward contracts

 

Other current assets

 

$

138

 

Accrued expenses and other current liabilities

 

$

11

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At May 3, 2014-
Interest rate swap

 

Other non-current assets

 

$

 

Other non-current liabilities

 

$

356

 

At February 1, 2014-
Interest rate swap

 

Other non-current assets

 

$

 

Other non-current liabilities

 

$

654

 

 

At May 3, 2014, we had 12 contracts to purchase United States dollars (“USD”) for an aggregate notional amount of Canadian dollars (“CAD”) $10.0 million maturing in various increments at various dates through September 2014 and 20 contracts to purchase USD for an aggregate notional amount of pounds Sterling (“GBP”) £15.5 million maturing in various increments at various dates through November 2014.  For the quarter ended May 3, 2014, we recognized a net pre-tax loss of $0.7 million in cost of sales in the condensed consolidated statement of earnings for our derivative financial instruments not designated as cash flow hedges.

 

At February 1, 2014, we had 28 contracts maturing in varying increments to purchase USD for an aggregate notional amount of GBP £17.5 million maturing at various dates through June 2014.

 

At May 4, 2013, we had four contracts to purchase Euros for an aggregate notional amount of US$0.5 million maturing in various increments at various dates through September 2013, eight contracts to purchase USD for an aggregate notional amount of CAD $2.0 million maturing in various increments at various dates through August 2013 and 14 contracts to purchase USD for an aggregate notional amount of GBP £11.7 million maturing in various increments at various dates through October 2013.  For the quarter ended May 4, 2013, we recognized a net pre-tax gain of $0.7 million in cost of sales in the condensed consolidated statement of earnings for our derivative financial instruments not designated as cash flow hedges.

 

In August 2013, we entered into a Term Loan due April 2018 with variable-rate interest payments (see Note 3).  To minimize the impact of changes in interest rates on our interest payments, in August 2013, we entered into an interest rate swap agreement with a financial institution to swap variable-rate interest payments for fixed-rate interest payments.  The interest rate swap agreement matures in April 2018 and has periodic interest settlements, both consistent with the terms of our Term Loan.  We have designated the interest rate swap as a cash flow hedge of the variability of interest payments under the Term Loan due to changes in the LIBOR benchmark interest rate.

 

Under this agreement, we receive a floating rate based on the 1-month LIBOR rate and pay a fixed rate of 3.02% (including the applicable margin of 1.75%) on the outstanding notional amount.  The swap fixed rate was structured to mirror the payment terms of the Term Loan.  At May 3, 2014, the fair value of the interest rate swap was a liability of $0.4 million and

 

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THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

was recorded in our consolidated balance sheet within other noncurrent liabilities with the effective portion of the loss reported as a component of accumulated other comprehensive income.  There was no hedge ineffectiveness at May 3, 2014.  Changes in fair value are reclassified from accumulated other comprehensive income into earnings in the same period that the hedged item affects earnings.  Over the next 12 months, approximately $1.0 million of the effective portion of the loss is expected to be reclassified from accumulated other comprehensive income into earnings.

 

If, at any time, the swap is determined to be ineffective, in whole or in part, due to changes in the interest rate swap or underlying debt agreements, the fair value of the portion of the swap determined to be ineffective will be recognized as a gain or loss in the statement of earnings for the applicable period.

 

We had no derivative financial instruments with credit-risk-related contingent features underlying the agreements as of May 3, 2014, February 1, 2014 or May 4, 2013, respectively.

 

12.  Segment Reporting

 

Our operations are conducted in two reportable segments, retail and corporate apparel, based on the way we manage, evaluate and internally report our business activities.

 

The retail segment includes the results from our four retail merchandising brands: Men’s Wearhouse, Men’s Wearhouse and Tux, Moores Clothing for Men (“Moores”) and K&G.  These four brands are operating segments that have been aggregated into the retail reportable segment based on their similar economic characteristics, products, production processes, target customers and distribution methods.  MW Cleaners is also aggregated in the retail segment as these operations have not had a significant effect on our revenues or expenses.  Specialty apparel merchandise offered by our four retail merchandising concepts include suits, suit separates, sport coats, slacks, sportswear, outerwear, dress shirts, shoes and accessories for men.  Ladies’ career apparel, sportswear and accessories, including shoes, and children’s apparel is offered at most of our K&G stores and tuxedo rentals are offered at our Men’s Wearhouse, Men’s Wearhouse and Tux and Moores retail stores.

 

On August 6, 2013, we acquired JA Holding, the parent company of the American clothing brand Joseph Abboud® and a U.S. tailored clothing factory.  Based on the manner in which we manage, evaluate and internally report our operations, we determined that JA Holding is a component of our Men’s Wearhouse brand and therefore has been included in our retail reportable segment.

 

The corporate apparel segment includes the results from our corporate apparel and uniform operations conducted by Twin Hill in the U.S. and Dimensions, Alexandra and Yaffy in the United Kingdom (“UK”).  The two corporate apparel and uniform concepts are operating segments that have been aggregated into the reportable corporate apparel segment based on their similar economic characteristics, products, production processes, target customers and distribution methods.  The corporate apparel segment provides corporate clothing uniforms and workwear to workforces.

 

We measure segment profitability based on operating income, defined as income before interest expense, interest income, income taxes and non-controlling interest.  Corporate expenses and assets are allocated to the retail segment.

 

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THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Net sales by brand and reportable segment are as follows (in thousands):

 

 

 

For the Quarter Ended

 

 

 

May 3, 2014

 

May 4, 2013

 

Net sales:

 

 

 

 

 

MW (1) 

 

$

420,979

 

$

401,835

 

Moores

 

52,502

 

53,771

 

K&G

 

92,421

 

97,340

 

MW Cleaners

 

7,747

 

7,235

 

Total retail segment

 

573,649

 

560,181

 

 

 

 

 

 

 

Twin Hill

 

8,244

 

7,959

 

Dimensions and Alexandra (UK)

 

48,581

 

48,396

 

Total corporate apparel segment

 

56,825

 

56,355

 

 

 

 

 

 

 

Total net sales

 

$

630,474

 

$

616,536

 

 


(1)  MW includes Men’s Wearhouse, Men’s Wearhouse and Tux stores and JA Holding.

 

The following table sets forth supplemental products and services sales information for the Company (in thousands):

 

 

 

For the Quarter Ended

 

 

 

May 3, 2014

 

May 4, 2013

 

Net sales:

 

 

 

 

 

Men’s tailored clothing product

 

$

239,436

 

$

234,844

 

Men’s non-tailored clothing product

 

171,106

 

166,773

 

Ladies’ clothing product

 

20,851

 

22,120

 

Other

 

1,631

 

 

Total retail clothing product

 

433,024

 

423,737

 

 

 

 

 

 

 

Tuxedo rental services

 

101,663

 

98,482

 

 

 

 

 

 

 

Alteration services

 

31,215

 

30,727

 

Retail dry cleaning services

 

7,747

 

7,235

 

Total alteration and other services

 

38,962

 

37,962

 

 

 

 

 

 

 

Corporate apparel clothing product

 

56,825

 

56,355

 

Total net sales

 

$

630,474

 

$

616,536

 

 

Operating income by reportable segment and the reconciliation to earnings before income taxes is as follows (in thousands):

 

 

 

For the Quarter Ended

 

 

 

May 3, 2014

 

May 4, 2013

 

Retail

 

$

26,525

 

$

51,470

 

Corporate apparel

 

756

 

1,083

 

Operating income

 

27,281

 

52,553

 

Interest income

 

61

 

121

 

Interest expense

 

(1,135

)

(344

)

Earnings before income taxes

 

$

26,207

 

$

52,330

 

 

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THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

13.  Legal Matters

 

A former licensee of JA Apparel, Corp., a subsidiary of JA Holding (“JA Apparel”), initiated an arbitration proceeding against JA Apparel under license agreements which the former licensee terminated. The former licensee alleges that JA Apparel breached the license agreements for the manufacture of certain Joseph Abboud® branded merchandise. We do not believe that JA Apparel breached the license agreements and we believe that the former licensee wrongfully terminated the license agreements. We intend to defend this matter vigorously. The range of loss, if any, is not reasonably estimable at this time, however, we do not believe that it will have a material adverse effect on our financial position, results of operations or cash flows.

 

In addition, we are involved in various routine legal proceedings, including ongoing litigation, incidental to the conduct of our business.  Management does not believe that any of these matters will have a material adverse effect on our financial position, results of operations or cash flows.

 

14.  Subsequent Events

 

Acquisition of Jos. A. Bank Clothiers, Inc.

 

As previously announced, on March 11, 2014, we entered into an Agreement and Plan of Merger with Jos. A. Bank Clothiers, Inc. (“Jos. A. Bank”) pursuant to which we will acquire all of the issued and outstanding shares of common stock of Jos. A. Bank for $65.00 per share in cash, or total consideration of approximately $1.8 billion. 

 

Concurrently with the signing of the merger agreement, we entered into a financing commitment letter (the “Commitment Letter”) with Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated, JPMorgan Chase Bank, N.A. and J.P. Morgan Securities LLC (collectively, the “Lenders”).  We expect the financing under the Commitment Letter, together with cash balances, to be sufficient to provide the financing necessary to consummate our offer to acquire all of the issued and outstanding shares of common stock of Jos. A. Bank and to refinance certain of our existing indebtedness.  The Commitment Letter provides for (i) $1.1 billion aggregate principal amount of senior secured term B loans, (ii) a $500.0 million asset-based revolving facility of the Company and certain of its subsidiaries and (iii) $600.0 million aggregate principal amount of unsecured bridge loans to the extent $600.0 million in gross proceeds are not raised from the issuance and sale by the Company of senior unsecured notes prior to the effective time of the merger.  The financing commitments of the Lenders are subject to certain conditions set forth in the Commitment Letter.

 

On May 30, 2014, the Federal Trade Commission granted termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, for the transaction.  The transaction remains subject to certain conditions set forth in the merger agreement and we expect the transaction to be completed during the second quarter of 2014.

 

Shareholder Rights Plan

 

On May 5, 2014, we entered into Amendment No. 1 (the “Amendment”) to the Rights Agreement (the “Rights Agreement”) dated as of October 10, 2013, with American Stock Transfer & Trust Company LLC.  The Amendment changes the expiration of the rights from September 30, 2014 to May 5, 2014, effectively terminating the Rights Agreement as of that date.  No preferred share purchase rights were exercised under the Rights Agreement as of May 5, 2014.

 

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Table of Contents

 

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 our Annual Report on Form 10-K for the year ended February 1, 2014.  References herein to years are to our 52-week or 53-week fiscal year, which ends on the Saturday nearest January 31 in the following calendar year.  For example, references to “2014” mean the 52-week fiscal year ending January 31, 2015.

 

Our operations are conducted in two reportable segments, retail and corporate apparel, based on the way we manage, evaluate and internally report our business activities.

 

We conduct our retail segment as a specialty apparel retailer offering suits, suit separates, sport coats, slacks, sportswear, outerwear, dress shirts, shoes and accessories for men, and tuxedo rentals.  We offer our products and services through multiple brands and channels including The Men’s Wearhouse, Men’s Wearhouse and Tux, Moores Clothing for Men (“Moores”), K&G and the Internet at www.menswearhouse.com.  Our stores are located throughout the United States (“U.S.”) and Canada and carry a wide selection of exclusive and non-exclusive merchandise brands.  In addition, we offer our customers alteration services and most of our K&G stores offer ladies’ career apparel, sportswear, accessories and shoes and children’s apparel.  MW Cleaners is also aggregated in the retail segment, as these operations have not had a significant effect on our revenues or expenses.  MW Cleaners conducts retail dry cleaning, laundry and heirlooming operations in the Houston, Texas area.

 

The corporate apparel segment includes the results from our corporate apparel and uniform operations conducted by Twin Hill in the U.S. and Dimensions, Alexandra and Yaffy in the United Kingdom (“UK”).  These operations provide corporate clothing uniforms and workwear to workforces through multiple channels including managed corporate accounts, catalogs and the Internet.

 

Refer to Note 12 of Notes to Condensed Consolidated Financial Statements for additional information and disclosures regarding our reportable segments and the discussion included in “Results of Operations” below.

 

We continue to evaluate strategic alternatives for our K&G operations. We believe that our core strengths lie primarily in our service culture and specialty men’s apparel retailing, and that we will be better able to focus our efforts on these core operations by taking this action.

 

On August 6, 2013, we acquired JA Holding, the parent company of the American clothing brand Joseph Abboud® and a U.S. tailored clothing factory, for $94.9 million in cash consideration.  We believe this transaction will accelerate our strategy of offering exclusive brands with broad appeal at attractive prices.  JA Holding is a component of our Men’s Wearhouse brand and therefore has been included in our retail reportable segment.

 

On March 11, 2014, we entered into an Agreement and Plan of Merger with Jos. A. Bank pursuant to which we will acquire all of the issued and outstanding shares of common stock of Jos. A. Bank for $65.00 per share in cash, or total consideration of approximately $1.8 billion.  Pursuant to the merger agreement, we amended our existing tender offer (as so amended, the “Offer”) to acquire all of the issued and outstanding shares of common stock of Jos. A. Bank and, following the consummation of the Offer, and subject to the satisfaction or waiver of the conditions set forth in the merger agreement, Java Corp., our wholly owned subsidiary, will merge with and into Jos. A. Bank and Jos. A. Bank will survive as our wholly owned subsidiary.  We believe that Jos. A. Bank’s business model in conjunction with the Men’s Wearhouse business model will create the opportunity for significant synergies.  On May 30, 2014, the Federal Trade Commission granted termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, for the transaction.  The transaction remains subject to certain conditions set forth in the merger agreement and we expect the transaction to be completed during the second quarter of 2014.

 

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Table of Contents

 

Overview

 

Highlights of our performance for the quarter ended May 3, 2014 compared to the quarter ended May 4, 2013 are presented below, followed by a more comprehensive discussion under “Results of Operations”:

 

·                  Revenues for the first quarter of 2014 increased by $13.9 million or 2.3% to $630.5 million compared to revenues of $616.5 million in the first quarter of 2013.

·                  Gross margin for the first quarter of 2014 increased by $5.4 million or 2.0% to $283.4 million compared to $277.9 million in the first quarter of 2013.  Gross margin as a percentage of total net sales for the first quarter of 2014 was 44.9% compared to 45.1% for the first quarter of 2013.

·                  Selling, general and administrative (“SG&A”) expenses for the first quarter of 2014 increased by $30.7 million or 13.6% to $256.1 million compared to SG&A expenses of $225.4 million in the first quarter of 2013.  SG&A expenses as a percentage of total net sales for the first quarter of 2014 was 40.6% compared to 36.6% for the first quarter of 2013.  First quarter 2014 SG&A expenses include $26.5 million in costs related to various strategic projects and cost reduction initiatives.

·                  Net earnings attributable to common shareholders for the first quarter of 2014 decreased by $16.6 million or 50.2% to $16.5 million compared to $33.1 million for the first quarter of 2013.

·                  Diluted earnings per common share attributable to common shareholders decreased 47.7% to $0.34 per share for the first quarter of 2014 compared to $0.65 per share for the first quarter of 2013.  The increase in SG&A expenses in the first quarter of 2014 due to costs related to various strategic projects and cost reduction initiatives resulted in a $0.35 decrease in diluted earnings per share.

·                  Net cash provided by our operating activities for the first quarter of 2014 was $69.8 million compared to $70.7 million for the first quarter of 2013.  We held cash and cash equivalent balances of $95.9 million at May 3, 2014, $59.3 million at February 1, 2014 and $155.1 million at May 4, 2013.

·                  During the first quarter of 2014, we paid cash dividends of $8.8 million.

 

Store data

 

The following table presents information with respect to retail apparel stores in operation during each of the respective fiscal periods:

 

 

 

For the Quarter
Ended

 

For the Year
Ended

 

 

 

May 3,
2014

 

May 4,
2013

 

February 1,
2014

 

 

 

 

 

 

 

 

 

Stores open at beginning of period:

 

1,124

 

1,143

 

1,143

 

Opened

 

10

 

6

 

25

 

Closed

 

(6

)

(8

)

(44

)

Stores open at end of period

 

1,128

 

1,141

 

1,124

 

 

 

 

 

 

 

 

 

Stores open at end of period:

 

 

 

 

 

 

 

Men’s Wearhouse

 

670

 

644

 

661

 

Men’s Wearhouse & Tux

 

244

 

281

 

248

 

Moores

 

120

 

120

 

121

 

K&G

 

94

 

96

 

94

 

 

 

1,128

 

1,141

 

1,124

 

 

During the first quarter of 2014, we opened ten Men’s Wearhouse stores and closed six stores (one Men’s Wearhouse store and one Moores store due to lease expiration and four Men’s Wearhouse & Tux stores: two due to lease expiration and two due to substandard performance).

 

Seasonality

 

Our sales and net earnings are subject to seasonal fluctuations.  Our tuxedo rental revenues are heavily concentrated in the second and third quarters while the fourth quarter is considered the seasonal low point.  With respect to corporate apparel sales and operating results, seasonal fluctuations are not significant but customer decisions to rebrand or revise their corporate wear programs can cause significant variations in period results.  Because of these fluctuations in our sales, results for any quarter are not necessarily indicative of the results that may be achieved for the full year.

 

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Table of Contents

 

Results of Operations

 

For the Quarter Ended May 3, 2014 compared to the Quarter Ended May 4, 2013

 

The following table sets forth our results of operations expressed as a percentage of net sales for the periods indicated:

 

 

 

For the Quarter
Ended 
(1)

 

 

 

May 3,

 

May 4,

 

 

 

2014

 

2013

 

Net sales:

 

 

 

 

 

Retail clothing product

 

68.7

%

68.7

%

Tuxedo rental services

 

16.1

 

16.0

 

Alteration and other services

 

6.2

 

6.2

 

Total retail sales

 

91.0

 

90.9

 

Corporate apparel clothing product sales

 

9.0

 

9.1

 

Total net sales

 

100.0

%

100.0

%

Cost of sales (2):

 

 

 

 

 

Retail clothing product

 

44.2

 

43.8

 

Tuxedo rental services

 

15.1

 

14.7

 

Alteration and other services

 

71.2

 

74.9

 

Occupancy costs

 

12.7

 

12.7

 

Total retail cost of sales

 

53.6

 

53.5

 

Corporate apparel clothing product cost of sales

 

69.9

 

69.1

 

Total cost of sales

 

55.1

 

54.9

 

Gross margin (2):

 

 

 

 

 

Retail clothing product

 

55.8

 

56.2

 

Tuxedo rental services

 

84.9

 

85.3

 

Alteration and other services

 

28.8

 

25.1

 

Occupancy costs

 

(12.7

)

(12.7

)

Total retail gross margin

 

46.4

 

46.5

 

Corporate apparel clothing product gross margin

 

30.1

 

30.9

 

Total gross margin

 

44.9

 

45.1

 

Selling, general and administrative expenses

 

40.6

 

36.6

 

Operating income

 

4.3

 

8.5

 

Interest income

 

0.0

 

0.0

 

Interest expense

 

(0.2

)

(0.1

)

Earnings before income taxes

 

4.2

 

8.5

 

Provision for income taxes

 

1.5

 

3.1

 

Net earnings including non-controlling interest

 

2.6

 

5.3

 

Net loss attributable to non-controlling interest

 

0.0

 

0.0

 

Net earnings attributable to common shareholders

 

2.6

%

5.4

%

 


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

(2)       Calculated as a percentage of related sales.

 

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Table of Contents

 

Total net sales increased $13.9 million, or 2.3%, to $630.5 million for the first quarter of 2014 as compared to the first quarter of 2013.

 

Total retail sales increased $13.5 million, or 2.4%, to $573.6 million for the first quarter of 2014 as compared to the first quarter of 2013 due mainly to a $9.3 million increase in retail clothing product revenues and a $3.2 million increase in tuxedo rental services revenues.  The net increase in total retail sales is attributable to the following:

 

(in millions)

 

Amount Attributed to

 

$

10.7

 

2.9% increase in comparable sales at Men’s Wearhouse/Men’s Wearhouse and Tux.

 

2.8

 

6.0% increase in comparable sales at Moores.

 

(1.1

)

1.2% decrease in comparable sales at K&G.

 

8.0

 

Increase from net sales of stores opened in 2013, relocated stores and expanded stores not yet included in comparable sales.

 

1.7

 

Increase in net sales from 10 new stores opened in 2014.

 

(7.1

)

Decrease in net sales resulting from closed stores.

 

(1.5

)

Other.

 

$

13.5

 

Increase in total retail sales.

 

 

Comparable sales exclude 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 and include e-commerce net sales.  The inclusion of e-commerce net sales did not have a significant effect on comparable sales.  The increase at Men’s Wearhouse/Men’s Wearhouse and Tux resulted from increased average transactions per store for clothing product that more than offset decreases in average unit retails (net selling prices).  The increase at Moores resulted from increased average transactions per store and units sold per transaction that more than offset a decrease in average unit retails.  The decrease at K&G was driven by decreased average transactions per store and decreased average unit retails that more than offset an increase in units sold per transaction.  In addition, tuxedo rental service revenues increased due primarily to increased unit rental rates.

 

Total corporate apparel clothing product sales increased $0.5 million to $56.8 million for the first quarter of 2014 as compared to first quarter of 2013.  UK corporate apparel sales increased $0.2 million due mainly to the impact of a stronger pound Sterling this year compared to last year, which more than offset a decrease in sales from existing customer programs resulting from a lower level of customer-directed new uniform rollouts in the first quarter of 2014 as compared to the first quarter of 2013.  U.S. corporate apparel sales increased $0.3 million due primarily to increased sales from new customer rollouts.

 

Buying and distribution costs are included in determining our retail and corporate apparel clothing product gross margins.  Our gross margin may not be comparable to other specialty retailers, as some companies exclude costs related to their distribution network from cost of goods sold while others, like us, include all or a portion of such costs in cost of goods sold and exclude them from SG&A expenses.  Tuxedo distribution costs are not included in determining our tuxedo rental services gross margin but are included in SG&A expenses.

 

Our total gross margin increased $5.4 million or 2.0% to $283.4 million in the first quarter of 2014 as compared to the first quarter of 2013.  Total retail segment gross margin increased $5.8 million or 2.2% from the same prior year quarter to $266.3 million in the first quarter of 2014.  For the retail segment, total gross margin as a percentage of related sales decreased slightly from 46.5% in the first quarter of 2013 to 46.4% in the first quarter of 2014 driven primarily by a decrease in retail clothing product gross margin rate primarily due to promotional events and a decrease in the tuxedo rental services gross margin rate due to increased royalty expenses.  These decreases in gross margin were partially offset by an increase in alteration and other services margin primarily due to lower alteration costs.  Occupancy costs as a percentage of retail sales, which is relatively constant on a per store basis and includes store related rent, common area maintenance, utilities, repairs and maintenance, security, property taxes and depreciation, remained flat at 12.7% for the first quarter of 2014 compared to the first quarter of 2013.  On an absolute dollar basis, occupancy costs increased $1.6 million primarily due to higher rent expense.

 

On an absolute dollar basis, corporate apparel gross margin decreased $0.3 million or 1.9% in the first quarter of 2014.  For the corporate apparel segment, total gross margin as a percentage of related sales decreased from 30.9% in the first quarter of 2013 to 30.1% in the first quarter of 2014 primarily due to changes in the sales mix at our U.S. operations.

 

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Table of Contents

 

SG&A expenses increased to $256.1 million in the first quarter of 2014 from $225.4 million in the first quarter of 2013, an increase of $30.7 million or 13.6%.  As a percentage of total net sales, these expenses increased from 36.6% in the first quarter of 2013 to 40.6% in the first quarter of 2014.  The components of this 4.0% net increase in SG&A expenses as a percentage of total net sales and the related absolute dollar changes were as follows:

 

%

 

Attributed to

 

3.1

 

Increase in other SG&A expenses as a percentage of total net sales from 20.4% in the first quarter of 2013 to 23.5% in the first quarter of 2014. On an absolute dollar basis, other SG&A expenses increased $23.0 million due to $26.5 million of costs related to various strategic projects and cost reduction initiatives partially offset by decreases in employee related and non-store payroll costs.

 

1.1

 

Increase in advertising expense as a percentage of total net sales from 3.5% in the first quarter of 2013 to 4.6% in the first quarter of 2014. On an absolute dollar basis, advertising expense increased $7.4 million primarily to introduce the rollout of Joseph Abboud® merchandise.

 

(0.2

)

Decrease in store salaries as a percentage of total net sales from 12.7% in the first quarter of 2013 to 12.5% in the first quarter of 2014. Store salaries on an absolute dollar basis increased $0.3 million primarily due to increased store sales support salaries and increased commissions associated with increased retail sales.

 

4.0

%

Total

 

 

In the retail segment, SG&A expenses as a percentage of related net sales increased from 37.3% in the first quarter of 2013 to 41.8% in the first quarter of 2014.  On an absolute dollar basis, retail segment SG&A expenses increased $30.7 million primarily due to costs related to various strategic projects and cost reduction initiatives and increased advertising expense.

 

In the corporate apparel segment, SG&A expenses as a percentage of related net sales decreased from 29.0% in the first quarter of 2013 to 28.7% in the first quarter of 2014.  On an absolute dollar basis, corporate apparel segment SG&A expenses remained flat.

 

Our effective income tax rate increased from 37.0% for the first quarter of 2013 to 37.2% for the first quarter of 2014.

 

These factors resulted in net earnings attributable to common shareholders of $16.5 million or 2.6% of total net sales for the first quarter of 2014, compared with net earnings of $33.1 million or 5.4% of total net sales for the first quarter of 2013.

 

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Table of Contents

 

Liquidity and Capital Resources

 

At May 3, 2014, February 1, 2014 and May 4, 2013, cash and cash equivalents totaled $95.9 million, $59.3 million and $155.1 million, respectively, and working capital was $490.7 million, $479.8 million and $532.0 million, respectively.  Our primary sources of working capital are cash flows from operations and borrowings under our Credit Agreement (as defined below).

 

Credit Facilities

 

On April 12, 2013, we entered into a Third Amended and Restated Credit Agreement (as amended, the “Credit Agreement”).  The Credit Agreement provides for a senior revolving credit facility of $300.0 million, with possible future increases to $450.0 million under an expansion feature and matures on April 12, 2018.  As of May 3, 2014, there were no borrowings outstanding under the senior revolving credit facility.

 

On August 6, 2013, we borrowed $100.0 million under the term loan (the “Term Loan”) provision of our Credit Agreement which will be repaid over five years, with 10% payable annually in quarterly installments and the remainder due at maturity.  The interest rate on the Term Loan is based on the monthly LIBOR rate plus 1.75%.  In conjunction with the Term Loan, we also entered into an interest rate swap in which the variable rate payments due under the Term Loan were exchanged for a fixed rate of 1.27%, resulting in a combined interest rate of 3.02%.  As of May 3, 2014, there was $95.0 million outstanding under the Term Loan.

 

We utilize letters of credit primarily to secure inventory purchases and as collateral for workers compensation claims.  At May 3, 2014, letters of credit totaling approximately $21.6 million were issued and outstanding.   Borrowings available under our Credit Agreement at May 3, 2014 were $278.4 million.

 

On March 11, 2014, we entered into an Agreement and Plan of Merger with Jos. A. Bank pursuant to which we will acquire all of the issued and outstanding shares of common stock of Jos. A. Bank for $65.00 per share in cash, or total consideration of approximately $1.8 billion.  Concurrently with the signing of the merger agreement, we entered into a financing commitment letter with various lenders, as further discussed in “Future sources and uses of cash” below.

 

Cash flow activities

 

Operating activities — Our primary source of operating cash flow is from sales to our customers.  Our primary uses of cash include clothing product inventory and tuxedo rental product purchases, personnel related expenses, occupancy costs, advertising costs and income tax payments.  Our operating activities provided net cash of $69.8 million in the first quarter of 2014, due mainly to net earnings, adjusted for non-cash charges, an increase in accounts payable, accrued expenses and other current liabilities and a decrease in other assets, offset by increases in inventories and tuxedo rental product.

 

·                  Inventories increased primarily due to our usual inventory replenishment following the holiday shopping season.

·                  Tuxedo rental product increased from purchases of replenishment product to support the continued growth of our tuxedo rental business.

·                  The decrease in other assets is primarily due to the timing and amounts of required tax payments.

·                  The increase in accounts payable, accrued expenses and other current liabilities was primarily due to the timing of vendor payments for inventory and tuxedo rental product purchases, the seasonal increase in tuxedo rental deposits and the impact of accrued professional fees related to various strategic projects.

 

During the first quarter of 2013, our operating activities provided net cash of $70.7 million, due mainly to net earnings, adjusted for non-cash charges, an increase in accounts payable, accrued expenses and other current liabilities and a decrease in other assets, offset by increases in inventories and tuxedo rental product.

 

·                  Inventories increased primarily due to our usual inventory replenishment following the holiday shopping season.

·                  Tuxedo rental product increased from purchases of new Vera Wang product offerings and replenishment product to support the continued growth of our tuxedo rental business.

·                  The decrease in other assets is primarily due to the timing and amounts of required tax payments.

·                  The increase in accounts payable, accrued expenses and other current liabilities was primarily due to the timing of vendor payments for inventory and tuxedo rental product purchases and the seasonal increase in tuxedo rental deposits.

 

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Table of Contents

 

Investing activities — Our cash outflows from investing activities are primarily for capital expenditures.  During the first quarter of 2014 and 2013, our investing activities used net cash of $22.5 million and $25.1 million, respectively, for capital expenditures.  Our capital expenditures relate to costs incurred for stores opened, remodeled or relocated during the period or under construction at the end of the period, office and distribution facility additions and infrastructure technology investments.

 

Financing activities — Our cash outflows from financing activities consist primarily of cash dividend payments and, in 2013, repurchases of common stock, while cash inflows from financing activities consist primarily of proceeds from the issuance of common stock.  During the first quarter of 2014 and 2013, our financing activities used net cash of $11.3 million and $45.8 million, respectively.  The decrease is due to reduced share repurchase activity in the current year compared to the same period last year.

 

Dividends  —  Cash dividends paid were approximately $8.8 million and $9.3 million for the quarter ended May 3, 2014 and May 4, 2013, respectively.  During the quarters ended May 3, 2014 and May 4, 2013, we declared quarterly dividends of $0.18 per share.

 

Future sources and uses of cash

 

Our primary use of cash is to finance working capital requirements of our operations.  In addition, we will use cash to fund capital expenditures, income taxes, dividend payments, repayment of long-term debt, repurchases of common stock, if any, operating leases and various other obligations, as they arise.

 

Capital expenditures are anticipated to be in the range of $80.0 to $90.0 million for 2014.  This amount includes the anticipated costs to open approximately 36 to 40 Men’s Wearhouse stores and three Moores stores and to expand and/or relocate approximately 16 existing Men’s Wearhouse stores and two existing Moores stores.  The balance of the capital expenditures for 2014 will be used for telecommunications, point-of-sale and other computer equipment and systems, store remodeling, distribution facilities and investment in other corporate assets.  The actual amount of future capital expenditures and inventory purchases will depend in part on the number of new stores opened and the terms on which new stores are leased, as well as on industry trends consistent with our anticipated operating plans.

 

Additionally, market conditions may produce attractive opportunities for us to make acquisitions, other than aforementioned Jos. A. Bank transaction.  Any such acquisitions may be undertaken as an alternative to opening new stores.  We may use cash on hand, together with cash flow from operations, borrowings under our existing or any future credit agreement and issuances of debt or equity securities, to take advantage of any significant acquisition opportunities.

 

Current domestic and global economic conditions, including high unemployment levels, reduced public sector spending and constrained credit markets, could negatively affect our future operating results as well as our existing cash and cash equivalents balances.  In addition, conditions in the financial markets could limit our access to additional capital resources, if needed, and could increase associated costs.  We believe based on our current business plan, that our existing cash and cash flows from operations will be sufficient to fund our planned store openings, relocations and remodels, other capital expenditures and operating cash requirements, and that we will be able to maintain compliance with the covenants in our Credit Agreement for at least the next 12 months.  Borrowings available under our Credit Agreement were $278.4 million as of May 3, 2014.

 

We are exposed to market risk associated with foreign currency exchange rate fluctuations as a result of our direct sourcing programs and our operations in foreign countries.  In connection with our direct sourcing programs, we may enter into merchandise purchase commitments that are denominated in a currency different from the functional currency of the operating entity.  Our risk management policy is to hedge a significant portion of forecasted merchandise purchases for our direct sourcing programs that bear foreign exchange risk using foreign exchange forward contracts.

 

In addition, we are exposed to interest rate risk associated with our outstanding indebtedness.  In connection with this indebtedness, we entered into an interest rate swap in which the variable rate payments due under our Term Loan were exchanged for a fixed rate.  Our risk management policy is to hedge our exposure to fluctuations in interest rates using this swap agreement.

 

As the foreign exchange forward contracts and interest rate swap agreement are with financial institutions, we are exposed to credit risk in the event of nonperformance by these parties.  However, due to the creditworthiness of these major financial institutions, full performance is anticipated.

 

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On March 11, 2014, we entered into an Agreement and Plan of Merger with Jos. A. Bank pursuant to which we will acquire all of the issued and outstanding shares of common stock of Jos. A. Bank for $65.00 per share in cash, or total consideration of approximately $1.8 billion.  Concurrently with the signing of the merger agreement, we entered into a financing commitment letter (the “Commitment Letter”) with Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated, JPMorgan Chase Bank, N.A. and J.P. Morgan Securities LLC (collectively, the “Lenders”).  We expect the financing under the Commitment Letter, together with cash balances, to be sufficient to provide the financing necessary to consummate our offer to acquire all of the issued and outstanding shares of common stock of Jos. A. Bank and to refinance certain of our existing indebtedness.  The Commitment Letter provides for (i) $1.1 billion aggregate principal amount of senior secured term B loans, (ii) a $500.0 million asset-based revolving facility of the Company and certain of its subsidiaries and (iii) $600.0 million aggregate principal amount of unsecured bridge loans to the extent $600.0 million in gross proceeds are not raised from the issuance and sale by the Company of senior unsecured notes prior to the effective time of the merger.  The financing commitments of the Lenders are subject to certain conditions set forth in the Commitment Letter.

 

Contractual Obligations

 

There have been no material changes to our contractual obligations as discussed in our Annual Report on Form 10-K for the fiscal year ended February 1, 2014.

 

Critical Accounting Policies and Estimates

 

The preparation of our condensed consolidated financial statements requires the appropriate application of accounting policies in accordance with generally accepted accounting principles.  In many instances, this also requires management to make estimates and assumptions about future events that affect the amounts and disclosures included in our financial statements.  We base our estimates on historical experience and various assumptions that we believe are reasonable under our current business model.  However, because future events and conditions and their effects cannot be determined with certainty, actual results will differ from our estimates and such differences could be material to our financial statements.  There have been no significant changes to our critical accounting policies and estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended February 1, 2014.

 

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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risks relating to our operations result primarily from changes in foreign currency exchange rates and changes in interest rates.  There have been no material changes to our market risks as disclosed in our Annual Report on Form 10-K for the year ended February 1, 2014.  Refer to Note 3 of Notes to Condensed Consolidated Financial Statements contained herein for disclosures regarding our Credit Agreement and Notes 10 and 11 of Notes to Condensed Consolidated Financial Statements contained herein for disclosures on our investments and derivative financial instruments.

 

ITEM 4 - CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

The Company’s management, with the participation of the Company’s principal executive officer (“CEO”) and principal financial officer (“CFO”), evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, the CEO and CFO have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective to ensure that information that is required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended May 3, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

On August 6, 2013, we acquired JA Holding.  We excluded the operations of JA Holding from the scope of our Sarbanes-Oxley Section 404 report on internal controls over financial reporting for the year ended February 1, 2014.  We are in the process of implementing our internal control structure over the acquired operations and expect that this effort will be completed in fiscal 2014.

 

PART II.  OTHER INFORMATION

 

ITEM 1 — LEGAL PROCEEDINGS

 

A former licensee of JA Apparel, Corp., a subsidiary of JA Holding (“JA Apparel”), initiated an arbitration proceeding against JA Apparel under license agreements which the former licensee terminated. The former licensee alleges that JA Apparel breached the license agreements for the manufacture of certain Joseph Abboud® branded merchandise. We do not believe that JA Apparel breached the license agreements and we believe that the former licensee wrongfully terminated the license agreements. We intend to defend this matter vigorously. The range of loss, if any, is not reasonably estimable at this time, however, we do not believe that it will have a material adverse effect on our financial position, results of operations or cash flows.

 

In addition, we are involved in various routine legal proceedings, including ongoing litigation, incidental to the conduct of our business.  Management does not believe that any of these matters will have a material adverse effect on our financial position, results of operations or cash flows.

 

ITEM 1A — RISK FACTORS

 

There have been no material changes in our risk factors from those disclosed in Item 1A contained in Part I of our Annual Report on Form 10-K for the fiscal year ended February 1, 2014.

 

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ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

(c)   The following table presents information with respect to purchases of common stock of the Company made during the quarter ended May 3, 2014 as defined by Rule 10b-18(a)(3) under the Exchange Act:

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

Number of

 

Approximate

 

 

 

 

 

 

 

Shares

 

Dollar Value of

 

 

 

 

 

 

 

Purchased

 

Shares that

 

 

 

 

 

 

 

as Part of

 

May Yet Be

 

 

 

 

 

 

 

Publicly

 

Purchased

 

 

 

Total Number

 

Average

 

Announced

 

Under the

 

 

 

of Shares

 

Price Paid

 

Plans or

 

Plans or

 

Period

 

Purchased

 

Per Share

 

Programs

 

Programs

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

(2)

 

 

 

 

 

 

 

 

 

 

 

February 2, 2014 through March 1, 2014

 

5,349

(1)

$

46.93

 

 

$

48,032

 

 

 

 

 

 

 

 

 

 

 

March 2, 2014 through April 5, 2014

 

 

$

 

 

$

48,032

 

 

 

 

 

 

 

 

 

 

 

April 6, 2014 through May 3, 2014

 

 

$

 

 

$

48,032

 

 

 

 

 

 

 

 

 

 

 

Total

 

5,349

 

$

46.93

 

 

$

48,032

 

 


(1)    Represents shares repurchased to satisfy tax withholding obligations arising upon the vesting of certain restricted stock.

(2)    Refer to Note 7 of Notes to Condensed Consolidated Financial Statements for information regarding our share repurchase program.

 

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ITEM 6 - EXHIBITS

 

(a)   Exhibits.

 

Exhibit
Number

 

 

 

Exhibit Index

 

 

 

 

 

4.1

 

 

Amendment No. 1 to Rights Agreement, dated as of May 5, 2014, by and between The Men’s Wearhouse, Inc. and American Stock Transfer & Trust Company, LLC, as Rights Agent (incorporated by reference from Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 5, 2014).

*10.1

 

 

Form of Performance-Based Deferred Stock Unit Award Agreement, for named executive officers, under The Men’s Wearhouse, Inc. 2004 Long-Term Incentive Plan (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 23, 2014).

*10.2

 

 

Form of Performance-Based Deferred Stock Unit Award Agreement, for executive officers, under The Men’s Wearhouse, Inc. 2004 Long-Term Incentive Plan (incorporated by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on April 23, 2014).

*10.3

 

 

Employment Agreement dated effective as of May 1, 2013, by and between The Men’s Wearhouse, Inc. and Charles Bresler (filed herewith).

10.4

 

 

First Amendment to Third Amended and Restated Credit Agreement, dated as of April 12, 2013, by and among The Men’s Wearhouse, Inc., Moores The Suit People Inc., MWUK Holding Company Limited, the financial institutions from time to time parties thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, JPMorgan Chase Bank, N.A., Toronto Branch, as Canadian Agent, and J.P. Morgan Europe Limited, as European Agent (filed herewith).

31.1

 

 

Certification of Periodic Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer (filed herewith).

31.2

 

 

Certification of Periodic Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer (filed herewith).

32.1

 

 

Certification of Periodic Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer (furnished herewith).

32.2

 

 

Certification of Periodic Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer (furnished herewith).

101.1

 

 

The following financial information from The Men’s Wearhouse, Inc.’s Quarterly Report on Form 10-Q for the quarter ended May 3, 2014, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Earnings; (iii) the Condensed Consolidated Statements of Comprehensive Income; (iv) the Condensed Consolidated Statements of Cash Flows; and (v) the Notes to Condensed Consolidated Financial Statements.

 


*  Management Compensation or Incentive Plan.

  This exhibit will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section.  Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as amended.

 

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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: June 6, 2014

 

THE MEN’S WEARHOUSE, INC.

 

 

 

 

 

 

 

By

/s/ JON W. KIMMINS

 

 

Jon W. Kimmins

 

 

Executive Vice President, Chief Financial Officer,
Treasurer and Principal Financial Officer

 

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EXHIBIT INDEX

 

Exhibit
Number

 

 

 

Exhibit Index

 

 

 

 

 

4.1

 

 

Amendment No. 1 to Rights Agreement, dated as of May 5, 2014, by and between The Men’s Wearhouse, Inc. and American Stock Transfer & Trust Company, LLC, as Rights Agent (incorporated by reference from Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 5, 2014).

*10.1

 

 

Form of Performance-Based Deferred Stock Unit Award Agreement, for named executive officers, under The Men’s Wearhouse, Inc. 2004 Long-Term Incentive Plan (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 23, 2014).

*10.2

 

 

Form of Performance-Based Deferred Stock Unit Award Agreement, for executive officers, under The Men’s Wearhouse, Inc. 2004 Long-Term Incentive Plan (incorporated by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on April 23, 2014).

*10.3

 

 

Employment Agreement dated effective as of May 1, 2013, by and between The Men’s Wearhouse, Inc. and Charles Bresler (filed herewith).

10.4

 

 

First Amendment to Third Amended and Restated Credit Agreement, dated as of April 12, 2013, by and among The Men’s Wearhouse, Inc., Moores The Suit People Inc., MWUK Holding Company Limited, the financial institutions from time to time parties thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, JPMorgan Chase Bank, N.A., Toronto Branch, as Canadian Agent, and J.P. Morgan Europe Limited, as European Agent (filed herewith).

31.1

 

 

Certification of Periodic Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer (filed herewith).

31.2

 

 

Certification of Periodic Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer (filed herewith).

32.1

 

 

Certification of Periodic Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer (furnished herewith).

32.2

 

 

Certification of Periodic Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer (furnished herewith).

101.1

 

 

The following financial information from The Men’s Wearhouse, Inc.’s Quarterly Report on Form 10-Q for the quarter ended May 3, 2014, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Earnings; (iii) the Condensed Consolidated Statements of Comprehensive Income; (iv) the Condensed Consolidated Statements of Cash Flows; and (v) the Notes to Condensed Consolidated Financial Statements.

 


*  Management Compensation or Incentive Plan.

  This exhibit will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section.  Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as amended.

 

31