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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended August 4, 2018 or

 

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

 

For the transition period from                   to                  

 

Commission file number 1-16097

 

TAILORED BRANDS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Texas

 

47-4908760

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification Number)

 

 

 

6380 Rogerdale Road

 

 

Houston, Texas

 

77072-1624

(Address of Principal Executive Offices)

 

(Zip Code)

 

(281) 776-7000

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒. No ☐.

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒. No ☐.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ☒

Accelerated filer  ☐

Non-accelerated filer  ☐

Smaller reporting company  ☐

Emerging growth company  ☐

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

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

 

The number of shares of common stock of the Registrant, par value $.01 per share, outstanding at August 31, 2018 was 49,913,573.

 

 

 


 

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 August 4, 2018, July 29, 2017 and February 3, 2018 

 

2

 

 

 

Condensed Consolidated Statements of Earnings for the Three and Six Months Ended August 4, 2018 and July 29, 2017 

 

3

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended August 4, 2018 and July 29, 2017 

 

4

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended August 4, 2018 and July 29, 2017 

 

5

 

 

 

Notes to Condensed Consolidated Financial Statements 

 

6

 

 

 

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

 

36

 

 

 

Item 3 — Quantitative and Qualitative Disclosures about Market Risk 

 

50

 

 

 

Item 4 — Controls and Procedures 

 

50

 

 

 

PART II — Other Information 

 

51

 

 

 

Item 1 — Legal Proceedings 

 

51

 

 

 

Item 6 — Exhibits 

 

51

 

 

 

SIGNATURES 

 

53

 

 

 

 

 


 

Table of Contents

Forward-Looking Statements

 

Certain statements made in this Quarterly Report on Form 10‑Q or in other materials we have filed or will file with the Securities and Exchange Commission (“SEC”) (as well as information included in oral statements or other written statements made or to be made by us) contains or may contain forward‑looking statements (as defined in the Private Securities Litigation Reform Act of 1995), including, but not limited to, statements regarding our future financial performance and financial condition.  Words such as “expects,” “anticipates,” “envisions,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements.  Forward‑looking statements reflect our current views regarding certain events that could affect our financial condition or results of operations and may include, but are not limited to, references to future sales, comparable sales, margins, costs, earnings, number and costs of store openings, closings, remodels, refreshes, relocations and expansions, capital expenditures, potential acquisitions or divestitures, synergies from acquisitions, business strategies, demand for clothing or rental product, economic conditions, market trends in the retail and corporate apparel clothing business, currency fluctuations, inflation and various political, legal, regulatory, social, economic and business trends. Forward‑looking statements are based upon management’s current beliefs or expectations and are inherently subject to significant business, economic and competitive risks, uncertainties and contingencies and third party approvals, many of which are beyond our control.

Any forward‑looking statements that we make herein and in future reports are not guarantees of future performance, and actual results may differ materially from those in such forward‑looking statements as a result of various factors. Factors that might cause or contribute to such differences include, but are not limited to: actions or inactions by governmental entities; domestic and international macro‑economic conditions; inflation or deflation; the loss of, or changes in, key personnel; success, or lack thereof, in formulating or executing our internal strategies and operating plans including new store and new market expansion plans; cost reduction initiatives and revenue enhancement strategies; changes in demand for clothing or rental product; market trends in the retail business; customer confidence and spending patterns; changes in traffic trends in our stores; customer acceptance of our merchandise strategies, including custom clothing; performance issues with key suppliers; disruptions in our supply chain; severe weather; foreign currency fluctuations; government export and import policies, including the enactment of duties or tariffs; advertising or marketing activities of competitors; the impact of cybersecurity threats or data breaches and legal proceedings.

Forward‑looking statements are intended to convey the Company’s expectations about the future, and speak only as of the date they are made.  We undertake no obligation to publicly update or revise any forward‑looking statements that may be made from time to time, whether as a result of new information, future developments or otherwise, except as required by applicable law. However, any further disclosures made on related subjects in our subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted.  This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995, and all written or oral forward-looking statements that are made by or attributable to us are expressly qualified in their entirety by the cautionary statements contained or referenced in this section.

 

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Table of Contents

PART I – FINANCIAL INFORMATION

 

ITEM 1 – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

TAILORED BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

    

August 4,

    

July 29,

    

February 3,

 

 

 

2018

 

2017

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

68,215

 

$

112,741

 

$

103,607

 

Accounts receivable, net

 

 

65,099

 

 

71,900

 

 

79,783

 

Inventories

 

 

786,510

 

 

944,783

 

 

851,931

 

Other current assets

 

 

87,491

 

 

55,432

 

 

78,252

 

Total current assets

 

 

1,007,315

 

 

1,184,856

 

 

1,113,573

 

PROPERTY AND EQUIPMENT, net

 

 

427,107

 

 

459,530

 

 

460,674

 

RENTAL PRODUCT, net

 

 

111,345

 

 

139,397

 

 

123,730

 

GOODWILL

 

 

103,686

 

 

119,880

 

 

120,292

 

INTANGIBLE ASSETS, net

 

 

165,881

 

 

170,113

 

 

168,987

 

OTHER ASSETS

 

 

13,497

 

 

5,948

 

 

12,699

 

TOTAL ASSETS

 

$

1,828,831

 

$

2,079,724

 

$

1,999,955

 

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

145,981

 

$

140,156

 

$

145,106

 

Accrued expenses and other current liabilities

 

 

313,319

 

 

276,616

 

 

285,537

 

Income taxes payable

 

 

6,659

 

 

6,310

 

 

6,121

 

Current portion of long-term debt

 

 

9,000

 

 

8,750

 

 

7,000

 

Total current liabilities

 

 

474,959

 

 

431,832

 

 

443,764

 

LONG-TERM DEBT, net

 

 

1,207,377

 

 

1,532,255

 

 

1,389,808

 

DEFERRED TAXES, net AND OTHER LIABILITIES

 

 

146,484

 

 

162,313

 

 

164,191

 

Total liabilities

 

 

1,828,820

 

 

2,126,400

 

 

1,997,763

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY (DEFICIT):

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

 

 —

 

 

 —

 

 

 —

 

Common stock

 

 

498

 

 

491

 

 

492

 

Capital in excess of par

 

 

498,670

 

 

478,174

 

 

491,648

 

Accumulated deficit

 

 

(470,377)

 

 

(497,160)

 

 

(479,166)

 

Accumulated other comprehensive loss

 

 

(28,780)

 

 

(28,181)

 

 

(10,782)

 

Total shareholders' equity (deficit)

 

 

11

 

 

(46,676)

 

 

2,192

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

 

$

1,828,831

 

$

2,079,724

 

$

1,999,955

 

 

See Notes to Condensed Consolidated Financial Statements.

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Table of Contents

TAILORED BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

    

August 4, 2018

    

July 29, 2017

    

August 4, 2018

    

July 29, 2017

 

Net sales:

 

 

    

 

 

    

 

 

    

    

 

    

 

Retail clothing product

 

$

605,788

 

$

594,994

 

$

1,219,432

 

$

1,178,579

 

Rental services

 

 

125,095

 

 

151,978

 

 

225,322

 

 

246,798

 

Alteration and other services

 

 

37,031

 

 

46,026

 

 

78,003

 

 

92,926

 

Total retail sales

 

 

767,914

 

 

792,998

 

 

1,522,757

 

 

1,518,303

 

Corporate apparel clothing product

 

 

55,516

 

 

57,760

 

 

118,637

 

 

115,361

 

Total net sales

 

 

823,430

 

 

850,758

 

 

1,641,394

 

 

1,633,664

 

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail clothing product

 

 

259,025

 

 

248,630

 

 

535,245

 

 

501,509

 

Rental services

 

 

19,366

 

 

23,957

 

 

34,023

 

 

40,125

 

Alteration and other services

 

 

33,749

 

 

35,076

 

 

67,927

 

 

69,548

 

Occupancy costs

 

 

101,772

 

 

103,326

 

 

202,791

 

 

208,415

 

Total retail cost of sales

 

 

413,912

 

 

410,989

 

 

839,986

 

 

819,597

 

Corporate apparel clothing product

 

 

40,616

 

 

43,073

 

 

87,282

 

 

84,931

 

Total cost of sales

 

 

454,528

 

 

454,062

 

 

927,268

 

 

904,528

 

Gross margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail clothing product

 

 

346,763

 

 

346,364

 

 

684,187

 

 

677,070

 

Rental services

 

 

105,729

 

 

128,021

 

 

191,299

 

 

206,673

 

Alteration and other services

 

 

3,282

 

 

10,950

 

 

10,076

 

 

23,378

 

Occupancy costs

 

 

(101,772)

 

 

(103,326)

 

 

(202,791)

 

 

(208,415)

 

Total retail gross margin

 

 

354,002

 

 

382,009

 

 

682,771

 

 

698,706

 

Corporate apparel clothing product

 

 

14,900

 

 

14,687

 

 

31,355

 

 

30,430

 

Total gross margin

 

 

368,902

 

 

396,696

 

 

714,126

 

 

729,136

 

Advertising expense

 

 

38,661

 

 

39,888

 

 

79,894

 

 

82,140

 

Selling, general and administrative expenses

 

 

242,255

 

 

248,343

 

 

493,349

 

 

507,529

 

Operating income

 

 

87,986

 

 

108,465

 

 

140,883

 

 

139,467

 

Interest income

 

 

122

 

 

98

 

 

207

 

 

165

 

Interest expense

 

 

(20,864)

 

 

(25,167)

 

 

(42,845)

 

 

(50,788)

 

(Loss) gain on extinguishment of debt, net

 

 

(8,122)

 

 

3,281

 

 

(20,833)

 

 

3,996

 

Earnings before income taxes

 

 

59,122

 

 

86,677

 

 

77,412

 

 

92,840

 

Provision for income taxes

 

 

9,884

 

 

28,206

 

 

14,265

 

 

32,530

 

Net earnings

 

$

49,238

 

$

58,471

 

$

63,147

 

$

60,310

 

Net earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.99

 

$

1.19

 

$

1.27

 

$

1.23

 

Diluted

 

$

0.97

 

$

1.19

 

$

1.24

 

$

1.23

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

49,840

 

 

49,107

 

 

49,649

 

 

48,958

 

Diluted

 

 

50,851

 

 

49,172

 

 

50,785

 

 

49,162

 

Cash dividends declared per common share

 

$

0.18

 

$

0.18

 

$

0.36

 

$

0.36

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

TAILORED BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

    

August 4,

    

July 29,

    

August 4,

    

July 29,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

49,238

 

$

58,471

 

$

63,147

 

$

60,310

 

Currency translation adjustments

 

 

(7,824)

 

 

14,773

 

 

(21,967)

 

 

16,114

 

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

 

 

1,169

 

 

(746)

 

 

3,969

 

 

(4,212)

 

Comprehensive income

 

$

42,583

 

$

72,498

 

$

45,149

 

$

72,212

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

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Table of Contents

TAILORED BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

 

    

August 4, 2018

    

July 29, 2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net earnings

 

$

63,147

 

$

60,310

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

52,719

 

 

53,407

 

Rental product amortization

 

 

19,755

 

 

21,205

 

Loss (gain) on extinguishment of debt, net

 

 

20,833

 

 

(3,996)

 

Amortization of deferred financing costs and discount on long-term debt

 

 

2,228

 

 

3,661

 

Loss on disposition of assets

 

 

7,768

 

 

1,381

 

Asset impairment charges

 

 

269

 

 

2,867

 

Share-based compensation

 

 

9,416

 

 

8,095

 

Deferred tax benefit

 

 

(2,240)

 

 

(242)

 

Deferred rent expense and other

 

 

247

 

 

309

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

10,461

 

 

(4,832)

 

Inventories

 

 

42,186

 

 

15,701

 

Rental product

 

 

(12,102)

 

 

(8,521)

 

Other assets

 

 

(9,372)

 

 

16,112

 

Accounts payable, accrued expenses and other current liabilities

 

 

(3,497)

 

 

(28,444)

 

Income taxes payable

 

 

697

 

 

4,964

 

Other liabilities

 

 

(4,524)

 

 

(1,448)

 

Net cash provided by operating activities

 

 

197,991

 

 

140,529

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Capital expenditures

 

 

(24,645)

 

 

(33,973)

 

Proceeds from divestiture of business

 

 

17,755

 

 

 —

 

Acquisition of business, net of cash

 

 

 —

 

 

(457)

 

Proceeds from sales of property and equipment

 

 

 —

 

 

2,157

 

Net cash used in investing activities

 

 

(6,890)

 

 

(32,273)

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Payments on original term loan

 

 

(993,420)

 

 

(8,129)

 

Proceeds from new term loan

 

 

895,500

 

 

 —

 

Payments on new term loan

 

 

(4,500)

 

 

 —

 

Proceeds from asset-based revolving credit facility

 

 

199,500

 

 

181,550

 

Payments on asset-based revolving credit facility

 

 

(95,000)

 

 

(181,550)

 

Repurchase and retirement of senior notes

 

 

(199,365)

 

 

(45,167)

 

Deferred financing costs

 

 

(5,644)

 

 

 —

 

Cash dividends paid

 

 

(18,744)

 

 

(18,033)

 

Proceeds from issuance of common stock

 

 

4,113

 

 

927

 

Tax payments related to vested deferred stock units

 

 

(6,501)

 

 

(1,644)

 

Net cash used in financing activities

 

 

(224,061)

 

 

(72,046)

 

Effect of exchange rate changes

 

 

(2,432)

 

 

5,642

 

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

 

(35,392)

 

 

41,852

 

Balance at beginning of period

 

 

103,607

 

 

70,889

 

Balance at end of period

 

$

68,215

 

$

112,741

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

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TAILORED BRANDS, 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 Tailored Brands, Inc. and its subsidiaries (the "Company") and have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC").  As applicable under such regulations, certain information and footnote disclosures have been condensed or omitted.  We believe the presentation and disclosures herein are adequate to make the information not misleading, and the condensed consolidated financial statements reflect all elimination entries and normal recurring adjustments which are necessary for a fair presentation of the financial position, results of operations and cash flows at the dates and for the periods presented.

 

Our business results historically have fluctuated throughout the year and, as a result, the operating results of the interim periods presented are not necessarily indicative of the results that may be achieved for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended February 3, 2018.

 

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

 

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

 

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

 

In August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 amends the existing hedge accounting model in order to enable entities to better portray the economics of their risk management activities in their financial statements. ASU 2017-12 is effective for public companies for annual reporting periods beginning after December 15, 2018, and interim periods within those fiscal years.  The guidance must be applied on a modified retrospective basis, while presentation and disclosure requirements set forth under ASU 2017-12 are required prospectively in all interim periods and fiscal years ending after the date of adoptionEarly adoption of ASU 2017-12 is permitted.  We do not expect the adoption of ASU 2017-12 to have a material impact on our financial position, results of operations or cash flows.

In February 2016, the FASB issued ASU No. 2016-02, Leases.  ASU 2016-02 increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  The main difference between previous U.S. GAAP and ASU 2016-02 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. ASU 2016-02 is effective for public companies for annual reporting periods beginning after December 15, 2018, and interim periods within those fiscal years.  Early adoption of ASU 2016-02 is permitted.  The guidance is required to be adopted using the modified retrospective approach, which provides an entity the option to apply the guidance at the beginning of the earliest comparative period presented, or at the beginning of the period in which it is adopted.  We have completed our review of the guidance and have made progress in our assessment phase including finalizing the practical expedient and accounting policy elections we will make upon adoption. While we are still evaluating the impact ASU 2016-02 will have on our consolidated financial statements and related disclosures, we expect that it will result in a significant increase in our long-term assets and liabilities given we have a considerable number of operating leases. 

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Table of Contents

TAILORED BRANDS, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

2.  Divestiture of MW Cleaners

 

On February 28, 2018, we entered into a definitive agreement to divest our MW Cleaners business for approximately $18.0 million, subject to certain adjustments, and the transaction closed on March 3, 2018.  During the first quarter of 2018, we received cash proceeds of $17.7 million and recorded a loss on the divestiture totaling $3.6 million, which is included within selling, general and administrative expenses (“SG&A”) in the condensed consolidated statement of earnings, and relates to our retail segment.  During the second quarter of 2018, we recorded a $0.2 million unfavorable final working capital adjustment, which is included in SG&A in the condensed consolidated statement of earnings, and relates to our retail segment.  For the six months ended August 4, 2018, the total loss on the divestiture of the MW Cleaners business totaled $3.8 million.

We determined that the sale of the MW Cleaners business did not represent a strategic shift and will not have a major effect on our consolidated results of operations, financial position or cash flows.  Accordingly, we have not presented the sale as a discontinued operation in the condensed consolidated financial statements. 

 

3.  Termination of Tuxedo Rental License Agreement with Macy's

 

During the first quarter of fiscal 2017, we reached an agreement with Macy's to wind down operations under the tuxedo rental license agreement established between Macy's and The Men's Wearhouse, Inc. ("The Men's Wearhouse") in 2015. The winding down of our tuxedo shops within Macy's was completed in fiscal 2017 and all tuxedo shops within Macy's closed in the second quarter of 2017. 

 

As a result of the agreement, during the first quarter of fiscal 2017, we incurred $17.2 million of termination-related costs, of which $14.6 million were cash charges.  These costs included $12.3 million related to contract termination, $1.4 million of rental product write-offs, $1.2 million of asset impairment charges and $2.3 million of other costs, all of which relate to our retail segment. Of the $17.2 million in termination-related costs, $15.8 million is recorded in SG&A and $1.4 million is included in cost of sales in the condensed consolidated statement of earnings.  All termination-related costs were paid in fiscal 2017.

 

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TAILORED BRANDS, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.  Earnings Per Share    

 

Basic earnings per common share is computed by dividing net earnings by the weighted-average common shares outstanding during the period.  Diluted earnings per common share is calculated using the treasury stock method.  Basic and diluted earnings per common share are computed using the actual net earnings 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 in our condensed consolidated statement of earnings and the accompanying notes. The following table sets forth the computation of basic and diluted earnings per common share (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

 

August 4,

 

July 29,

 

August 4,

 

July 29,

 

 

    

2018

    

2017

    

2018

    

2017

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

49,238

 

$

58,471

 

$

63,147

 

$

60,310

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted-average common shares outstanding

 

 

49,840

 

 

49,107

 

 

49,649

 

 

48,958

 

Dilutive effect of share-based awards

 

 

1,011

 

 

65

 

 

1,136

 

 

204

 

Diluted weighted-average common shares outstanding

 

 

50,851

 

 

49,172

 

 

50,785

 

 

49,162

 

Net earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.99

 

$

1.19

 

$

1.27

 

$

1.23

 

Diluted

 

$

0.97

 

$

1.19

 

$

1.24

 

$

1.23

 

 

For the three and six months ended August 4, 2018,  0.7 million and 0.5 million anti-dilutive shares of common stock were excluded from the calculation of diluted earnings per common share, respectively.  For the three and six months ended July 29, 2017,  2.5 million and 2.0 million anti-dilutive shares of common stock were excluded from the calculation of diluted earnings per common share, respectively

 

5.  Debt

 

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

 

In October 2017, The Men’s Wearhouse amended the ABL Facility in part to increase the principal amount available to $550.0 million and extend the maturity date to October 2022.  In April 2018, The Men’s Wearhouse refinanced its Original Term Loan.  See Credit Facilities section below for additional information. 

 

The Credit Facilities and the Senior Notes contain customary non-financial and financial covenants, including fixed charge coverage ratios, total leverage ratios and secured leverage ratios.  Should our total leverage ratio and secured leverage ratio exceed certain thresholds specified in the agreements, we would be subject to certain additional restrictions, including limitations on our ability to make significant acquisitions and incur additional indebtedness. As of August 4, 2018, our total leverage ratio and secured leverage ratio are below these thresholds and we believe these ratios will remain below the thresholds specified in the agreements for the foreseeable future, which results in the elimination of these additional restrictions. In addition, as a result of the refinancing of our Original Term Loan and amending of our ABL Facility, our ability to pay dividends on our common stock has increased from a maximum of $10.0 million per quarter to a maximum of $15.0 million per quarter.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Credit Facilities

 

In April 2018, we refinanced our Original Term Loan.  Immediately prior to the refinancing, the Original Term Loan consisted of $593.4 million in aggregate principal amount with an interest rate of LIBOR plus 3.50% (with a floor of 1.0%) and $400.0 million in aggregate principal amount with a fixed rate of 5.0% per annum.  Upon entering into the refinancing, we made a prepayment of $93.4 million on the Original Term Loan using cash on hand.

 

As a result, we refinanced $900.0 million in aggregate principal amount of term loans then outstanding with a new Term Loan totaling $900.0 million (the “New Term Loan”).  Additionally, we may continue to request additional term loans or incremental equivalent debt borrowings, all of which are uncommitted, in an aggregate amount up to the greater of (1) $250.0 million and (2) an aggregate principal amount such that, on a pro forma basis (giving effect to such borrowings), our senior secured leverage ratio will not exceed 2.5 to 1.0. 

 

The New Term Loan will bear interest at a rate per annum equal to an applicable margin plus, at the Company’s option, either LIBOR (with a floor of 1.0%) or the base rate (with a floor of 2.0%).  The margins for borrowings under the New Term Loan are 3.50% for LIBOR and 2.50% for the base rate.  The New Term Loan will amortize in an annual amount equal to 1.0% of the principal amount of the New Term Loan, payable quarterly commencing on May 1, 2018.  Proceeds from the New Term Loan were reduced by a $4.5 million OID, which is presented as a reduction of the outstanding balance on the New Term Loan on the balance sheet and will be amortized to interest expense over the contractual life of the New Term Loan. 

 

The New Term Loan extends the maturity date of the Original Term Loan from June 18, 2021 until April 9, 2025, subject to a springing maturity provision that would accelerate the maturity of the New Term Loan to April 1, 2022 if any of the Company’s obligations under its Senior Notes remain outstanding on April 1, 2022.

 

The interest rate on the New Term Loan is based on 1-month LIBOR, which was 2.08% at August 4, 2018, plus the applicable margin of 3.50%, resulting in a total interest rate of 5.58%.  We have two interest rate swap agreements where the variable rates due under the New Term Loan have been exchanged for a fixed rate, including a new interest rate swap entered into during June 2018.  At August 4, 2018, the total notional amount under these interest rate swaps is $715.0 million.  Please see Note 15 for additional information on our interest rate swaps.

 

As a result of our interest rate swaps, 80% of the variable interest rate under the New Term Loan has been converted to a fixed rate.  As of August 4, 2018, the New Term Loan had a weighted average interest rate of 5.90%.

 

In connection with the refinancing of the New Term Loan, we incurred deferred financing costs of $5.6 million, which will be amortized over the life of the New Term Loan using the interest method.  In addition, as a result of the refinancing, we recorded a loss on extinguishment of debt totaling $11.9 million consisting of the elimination of unamortized deferred financing costs and OID related to the Original Term Loan, which is included as a separate line in the condensed consolidated statement of earnings.

 

In October 2017, we amended our ABL Facility, which now provides for a senior secured revolving credit facility of $550.0 million, with possible future increases to $650.0 million under an expansion feature, that matures in October 2022, and is guaranteed, jointly and severally, by Tailored Brands, Inc. and certain of our U.S. subsidiaries. The ABL Facility has several borrowing and interest rate options including the following indices:  (i) adjusted LIBOR, (ii) Canadian Dollar Offered Rate ("CDOR") rate, (iii) Canadian prime rate or (iv) an alternate base rate (equal to the greater of the prime rate, the New York Federal Reserve Bank (“NYFRB”) rate plus 0.5% or adjusted LIBOR for a one-month interest period plus 1.0%). Advances under the ABL Facility bear interest at a rate per annum using the applicable indices plus a varying interest rate margin of up to 1.75%.  The ABL Facility also provides for fees applicable to amounts available to be drawn under outstanding letters of credit which range from 1.25% to 1.75%, and a fee on unused commitments of 0.25%.  As of August 4, 2018, $104.5 million in borrowings were outstanding under the ABL Facility at a weighted average interest rate of approximately 3.8%. During the six months ended August 4, 2018, the maximum borrowing outstanding under the ABL Facility was $104.5 million.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The obligations under the Credit Facilities are secured on a senior basis by a first priority lien on substantially all of the assets of the Company, The Men’s Wearhouse and its U.S. subsidiaries and, in the case of the ABL Facility, Moores The Suit People Inc. The Credit Facilities and the related guarantees and security interests granted thereunder are senior secured obligations of, and will rank equally with all present and future senior indebtedness of the Company, the co-borrowers and the respective guarantors. 

We utilize letters of credit primarily as collateral for workers compensation claims and to secure inventory purchases.  At August 4, 2018, letters of credit totaling approximately $33.9 million were issued and outstanding. Borrowings available under the ABL Facility as of August 4, 2018 were $332.1 million.

 

Senior Notes

 

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

 

During the second quarter of 2018, we completed a partial redemption of $175.0 million in face value of our Senior Notes.  The Senior Notes were redeemed at a redemption price equal to $1,035 per $1,000 principal amount, plus accrued and unpaid interest. As a result, we recorded a net loss on extinguishment totaling $8.1 million, which is included as a separate line in the condensed consolidated statement of earnings.  The net loss on extinguishment reflects a $6.1 million loss upon repurchase of the Senior Notes and the elimination of unamortized deferred financing costs totaling $2.0 million related to the Senior Notes. 

 

For the six months ended August 4, 2018, as a result of the partial redemption of $175.0 million in face value of our Senior Notes as well as the repurchase and retirement of $17.6 million in face value of Senior Notes through open market transactions, we recorded a net loss on extinguishment totaling $8.9 million, which is included as a separate line in the condensed consolidated statement of earnings.  The net loss on extinguishment reflects a $6.7 million loss upon repurchase and the elimination of unamortized deferred financing costs totaling $2.2 million related to the Senior Notes.

 

Long-Term Debt

 

The following table provides details on our long-term debt as of August 4, 2018, July 29, 2017 and February 3, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

August 4,

 

July 29,

 

February 3,

 

 

    

2018

    

2017

    

2018

 

Term Loan (net of unamortized OID of $4.3 million at August 4, 2018, $3.6 million at July 29, 2017, and $3.0 million at February 3, 2018)

 

$

891,210

 

$

1,035,030

 

$

990,465

 

Senior Notes

 

 

228,607

 

 

525,000

 

 

421,209

 

ABL Facility

 

 

104,500

 

 

 —

 

 

 —

 

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

 

 

(7,940)

 

 

(19,025)

 

 

(14,866)

 

Total long-term debt, net

 

 

1,216,377

 

 

1,541,005

 

 

1,396,808

 

Current portion of long-term debt

 

 

(9,000)

 

 

(8,750)

 

 

(7,000)

 

Total long-term debt, net of current portion

 

$

1,207,377

 

$

1,532,255

 

$

1,389,808

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

6.  Revenue Recognition

 

Adoption of ASC 606

 

Effective February 4, 2018, we adopted ASC 606, Revenue from Contracts with Customers and all related amendments (“ASC 606”), to all contracts using the modified retrospective approach.  We recognized the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of retained earnings.  The adoption had no impact to our previously reported results of operations or cash flows.  The comparative period information has not been restated and continues to be reported under the accounting standards in effect for the period presented. 

 

The following table depicts the cumulative effect of the changes made to our February 3, 2018 balance sheet for the adoption of ASC 606 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported

 

 

 

Adjusted

 

 

 

Balance at

 

Impact of

 

Balance at

 

 

 

February 3,

 

Adoption of

 

February 3,

 

 

    

2018

    

ASU 606

    

2018

 

Assets:

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

79,783

 

$

(303)

 

$

79,480

 

Inventories

 

 

851,931

 

 

(17,837)

 

 

834,094

 

Other current assets

 

 

78,252

 

 

2,753

 

 

81,005

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

Accrued expenses and other current liabilities

 

 

285,537

 

 

32,378

 

 

317,915

 

Deferred taxes, net and other liabilities

 

 

164,191

 

 

(11,941)

 

 

152,250

 

Equity:

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

 

(479,166)

 

 

(35,824)

 

 

(514,990)

 

 

The adoption of ASC 606 primarily impacted the timing of revenue recognition related to our customer loyalty program, gift cards and e-commerce sales within our retail segment, as discussed in more detail below.  In addition, for our corporate apparel segment, certain deferred revenue balances along with related inventory amounts were eliminated as part of the cumulative adjustment to opening retained earnings.  Also, for estimated sales returns, we now recognize allowances for estimated sales returns on a gross basis rather than a net basis on the condensed consolidated balance sheets.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Revenues

 

The following table depicts the disaggregation of revenue by major source (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

    

August 4, 2018

    

July 29, 2017

    

August 4, 2018

    

July 29, 2017

 

Net sales:

 

 

    

 

 

    

 

 

    

 

 

    

 

Men's tailored clothing product

 

$

356,504

 

$

341,182

 

$

712,241

 

$

673,812

 

Men's non-tailored clothing product

 

 

229,105

 

 

234,093

 

 

464,711

 

 

462,792

 

Women's clothing product

 

 

17,447

 

 

18,100

 

 

37,029

 

 

37,927

 

Other (1)

 

 

2,732

 

 

1,619

 

 

5,451

 

 

4,048

 

Total retail clothing product

 

 

605,788

 

 

594,994

 

 

1,219,432

 

 

1,178,579

 

Rental services

 

 

125,095

 

 

151,978

 

 

225,322

 

 

246,798

 

Alteration services

 

 

37,031

 

 

37,227

 

 

75,452

 

 

75,613

 

Retail dry cleaning services (2)

 

 

 —

 

 

8,799

 

 

2,551

 

 

17,313

 

Total alteration and other services

 

 

37,031

 

 

46,026

 

 

78,003

 

 

92,926

 

Total retail sales

 

 

767,914

 

 

792,998

 

 

1,522,757

 

 

1,518,303

 

Corporate apparel clothing product

 

 

55,516

 

 

57,760

 

 

118,637

 

 

115,361

 

Total net sales

 

$

823,430

 

$

850,758

 

$

1,641,394

 

$

1,633,664

 


(1)

Other consists of franchise and licensing revenues and gift card breakage.  Franchise revenues are generally recognized at a point in time while licensing revenues consist primarily of minimum guaranteed royalty amounts recognized over an elapsed time period.

(2)

On March 3, 2018, we completed the divestiture of our MW Cleaners business.  Please see Note 2 for additional information.

 

Please see Note 16 for additional information regarding our reporting segments.

 

Retail Segment

For retail clothing product revenue, we transfer control and recognize revenue at a point in time, upon sale or shipment of the merchandise, net of actual sales returns and a provision for estimated sales returns.  For rental and alteration services, we transfer control and recognize revenue at a point in time, upon receipt by the customer.  Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services.  Sales, use and value added taxes we collect from our customers and are remitted to governmental agencies are excluded from revenue.   

 

Loyalty Program

 

We maintain a customer loyalty program for our Men’s Wearhouse, Men’s Wearhouse and Tux, Jos. A. Bank and Moores brands in which customers receive points for purchases. Points are generally equivalent to dollars spent on a one‑to‑one basis, excluding any sales tax dollars, and do not expire. Upon reaching 500 points, customers are issued a $50 rewards certificate which they may redeem for purchases at our stores or online. Generally, reward certificates earned must be redeemed no later than six months from the date of issuance.  We believe our loyalty program represents a customer option that is a material right and, accordingly, is a performance obligation in the contract with our customer.  Therefore, we will record our obligation for future point redemptions using a deferred revenue model.  In prior years, we used an incremental cost approach where we accrued the estimated costs of the anticipated certificate redemptions when the certificates were issued and charged such costs to cost of sales.

 

When loyalty program members earn points, we recognize a portion of the transaction as revenue for merchandise product sales or services and defer a portion of the transaction representing the value of the related points. The value of the points

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

is recorded in deferred revenue on our condensed consolidated balance sheet and recognized into revenue when the points are converted into a rewards certificate and the certificate is used.

 

We account for points earned and certificates issued that will never be redeemed by loyalty members, which we refer to as breakage. We review our breakage estimates at least annually based upon the latest available information regarding redemption and expiration patterns.

 

Our estimate of the expected expiration of points and certificates requires significant management judgment. Current and future changes to our assumptions or to loyalty program rules may result in material changes to the deferred revenue balance as well as recognized revenues from the loyalty program.  For example, during fiscal 2018, we plan to test potential changes to our loyalty program in order to improve the effectiveness of the program.

 

Gift Card Breakage

 

Proceeds from the sale of gift cards are recorded as a liability and are recognized as net sales from products and services when the cards are redeemed.  Our gift cards do not have expiration dates.  In addition, we recognize revenue for gift cards for which the likelihood of redemption is deemed to be remote and for which there is no legal obligation to remit the value of such unredeemed gift cards to any relevant jurisdictions (commonly referred to as gift card breakage) under the redemption recognition method. This method records gift card breakage as revenue on a proportional basis over the redemption period based on our historical gift card breakage rate. We review our gift card breakage estimate based on our historical redemption patterns.  In prior years, we recognized income from breakage of gift cards as a reduction of SG&A when the likelihood of redemption of the gift card was remote.

 

Sales Returns

 

Revenue from merchandise product sales and services is reported net of sales returns, which includes an estimate of future returns based on historical return rates, with a corresponding reduction to cost of sales. Our refund liability for sales returns was $5.9 million at August 4, 2018, which is included in accrued and other current liabilities and represents the expected value of the refund that will be due to our customers.  We also have a corresponding asset included in other current assets that represents the right to recover products from customers associated with sales returns of $2.6 million at August 4, 2018.  In prior years, we recognized a provision for estimated sales returns on a net basis.

 

Corporate Apparel Segment

 

For our corporate apparel segment, we sell corporate clothing and uniforms to workforces under a contract or by purchase order.  We transfer control and recognize revenue at a point in time, generally upon delivery of the product to the customer.  Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services.  Sales, use and value added taxes we collect from our customers and are remitted to governmental agencies are excluded from revenue.   

 

Contract Liabilities

 

The following table summarizes the opening and closing balances of our contract liabilities (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at

 

Increase

 

Balance at

 

 

    

February 3, 2018

    

(Decrease)

    

August 4, 2018

 

 

 

As Adjusted

 

 

 

 

 

 

 

Contract liabilities

 

$

141,552

 

$

21,858

 

$

163,410

 

 

Contract liabilities include cash payments received from customers in advance of our performance, including amounts which are refundable.  These liabilities primarily consist of customer deposits related to rental product or custom clothing transactions since we typically receive payment from our customers prior to our performance and deferred revenue related

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

to our loyalty programs and unredeemed gift cards.  These amounts are included as “Customer deposits, prepayments and refunds payable,” “Loyalty program liabilities” and “Unredeemed gift cards,” respectively, within the accrued expenses and other current liabilities line item on our consolidated balance sheet.  Please see Note 10 for additional information on our accrued expenses and other current liabilities.

 

The amount of revenue recognized for the three and six months ended August 4, 2018 that was included in the opening contract liability balance was $62.4 million and $104.1 million, respectively.  This revenue primarily consists of recognition of deposits for completed transactions as well as redeemed certificates related to our loyalty program and gift card redemptions.

 

Practical Expedients and Impact on Fiscal 2018 Results

 

Due to the short term nature of a significant portion of our contracts with customers, we have elected to apply the practical expedients under ASC 606 to:  (1) not adjust the consideration for the effects of a significant financing component, (2) recognize incremental costs of obtaining a contract as expense when incurred and (3) not disclose the value of our unsatisfied performance obligations for contracts with an original expected duration of one year or less. 

 

In accordance with ASC 606, the following tables reflect the impact on our fiscal 2018 condensed consolidated statement of earnings and balance sheet as if we had continued to apply accounting standards in effect last year (“Legacy GAAP”) (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

Statement of Earnings

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended August 4, 2018

 

 

 

As

 

Amounts Under

 

Effect of Change

 

 

    

Reported

    

Legacy GAAP

    

Increase/(Decrease)

 

Net sales:

 

 

 

 

 

 

 

 

 

 

Total retail sales

 

$

767,914

 

$

762,538

 

$

(5,376)

 

Corporate apparel clothing product

 

 

55,516

 

 

57,394

 

 

1,878

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

Total retail cost of sales

 

 

413,912

 

 

413,640

 

 

(272)

 

Total corporate apparel clothing product cost of sales

 

 

40,616

 

 

42,054

 

 

1,438

 

Selling, general and administrative expenses

 

 

242,255

 

 

241,847

 

 

(408)

 

Provision for income taxes

 

 

9,884

 

 

9,172

 

 

(712)

 

Net earnings

 

 

49,238

 

 

45,694

 

 

(3,544)

 

Diluted net earnings per common share

 

$

                   0.97

 

$

                  0.90

 

$

(0.07)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended August 4, 2018

 

 

 

As

 

Amounts Under

 

Effect of Change

 

 

    

Reported

    

Legacy GAAP

    

Increase/(Decrease)

 

Net sales:

 

 

 

 

 

 

 

 

 

 

Total retail sales

 

$

1,522,757

 

$

1,520,626

 

$

(2,131)

 

Corporate apparel clothing product

 

 

118,637

 

 

123,896

 

 

5,259

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

Total retail cost of sales

 

 

839,986

 

 

839,966

 

 

(20)

 

Total corporate apparel clothing product cost of sales

 

 

87,282

 

 

91,529

 

 

4,247

 

Selling, general and administrative expenses

 

 

493,349

 

 

492,604

 

 

(745)

 

Provision for income taxes

 

 

14,265

 

 

14,200

 

 

(65)

 

Net earnings

 

 

63,147

 

 

62,858

 

 

(289)