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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 3, 2003 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
THE MEN'S WEARHOUSE, INC.
(Exact Name of Registrant as Specified in its Charter)
TEXAS 74-1790172
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
5803 GLENMONT DRIVE
HOUSTON, TEXAS 77081-1701
(Address of Principal Executive Offices) (Zip Code)
(713) 592-7200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]. No [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X]. No [ ].
The number of shares of common stock of the Registrant, par value $.01 per
share, outstanding at June 13, 2003 was 39,414,717, excluding 3,189,523 shares
classified as Treasury Stock.
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REPORT INDEX
PART AND ITEM NO. PAGE NO.
- ----------------- --------
PART I - Financial Information
Item 1 - Financial Statements
General Information...................................................................... 1
Consolidated Balance Sheets as of May 4, 2002 (unaudited), May 3, 2003 2
(unaudited) and February 1, 2003.......................................................
Consolidated Statements of Earnings for the Quarters Ended May 4, 2002 (unaudited)
and May 3, 2003 (unaudited)............................................................ 3
Consolidated Statements of Cash Flows for the Quarters Ended May 4, 2002
(unaudited) and May 3, 2003 (unaudited)................................................ 4
Notes to Consolidated Financial Statements............................................... 5
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................................... 9
Item 3 - Qualitative and Quantitative Disclosures about Market Risk...................... 12
Item 4 - Controls and Procedures......................................................... 12
PART II - Other Information
Item 1 - Legal Proceedings............................................................... 13
Item 6 - Exhibits and Reports on Form 8-K................................................ 14
SIGNATURES.................................................................................... 14
CERTIFICATIONS................................................................................ 15
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
GENERAL INFORMATION
The consolidated financial statements herein include the accounts of The
Men's Wearhouse, Inc. and its subsidiaries (the "Company") and have been
prepared without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission (the "SEC"). As applicable under such regulations,
certain information and footnote disclosures have been condensed or omitted. We
believe that the presentation and disclosures herein are adequate to make the
information not misleading, and the financial statements reflect all elimination
entries and normal adjustments which are necessary for a fair statement of the
results for the three months ended May 4, 2002 and May 3, 2003.
Operating results for interim periods are not necessarily indicative of the
results for full years. It is suggested that these consolidated financial
statements be read in conjunction with the consolidated financial statements for
the year ended February 1, 2003 and the related notes thereto included in the
Company's Annual Report on Form 10-K for the year then ended filed with the SEC.
Unless the context otherwise requires, "Company", "we", "us" and "our" refer
to The Men's Wearhouse, Inc. and its subsidiaries.
1
THE MEN'S WEARHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MAY 4, MAY 3, FEBRUARY 1,
ASSETS 2002 2003 2003
--------------- --------------- ---------------
(UNAUDITED) (UNAUDITED)
CURRENT ASSETS:
Cash.......................................................... $ 52,427 $ 77,995 $ 84,924
Inventories................................................... 376,285 391,062 360,159
Other current assets.......................................... 40,479 48,796 49,499
--------------- --------------- ---------------
Total current assets....................................... 469,191 517,853 494,582
PROPERTY AND EQUIPMENT, net..................................... 211,520 207,775 210,180
OTHER ASSETS, net............................................... 55,423 69,415 64,551
--------------- --------------- ---------------
TOTAL................................................. $ 736,134 $ 795,043 $ 769,313
=============== =============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............................................. $ 88,457 $ 111,226 $ 98,716
Accrued expenses.............................................. 47,091 49,535 55,323
Current portion of long-term debt............................. 2,399 2,185 2,037
Income taxes payable.......................................... 14,871 17,997 13,234
--------------- --------------- ---------------
Total current liabilities.................................. 152,818 180,943 169,310
LONG-TERM DEBT.................................................. 37,788 40,961 38,709
DEFERRED TAXES AND OTHER LIABILITIES............................ 21,821 27,935 29,533
--------------- --------------- ---------------
Total liabilities.......................................... 212,427 249,839 237,552
--------------- --------------- ---------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock............................................... -- -- --
Common stock.................................................. 425 426 426
Capital in excess of par...................................... 193,737 195,928 196,146
Retained earnings............................................. 365,586 408,552 397,540
Accumulated other comprehensive (loss) income................. (1,682) 4,880 66
---------------- --------------- ---------------
Total...................................................... 558,066 609,786 594,178
Treasury stock, at cost....................................... (34,359) (64,582) (62,417)
---------------- ---------------- ----------------
Total shareholders' equity................................. 523,707 545,204 531,761
--------------- --------------- ---------------
TOTAL................................................. $ 736,134 $ 795,043 $ 769,313
=============== =============== ===============
See Notes to Consolidated Financial Statements.
2
THE MEN'S WEARHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE QUARTER ENDED
-----------------------------------
MAY 4, MAY 3,
2002 2003
---------------- ----------------
Net sales........................................................... $ 303,857 $ 313,122
Cost of goods sold, including buying and occupancy costs............ 199,702 201,903
---------------- ----------------
Gross margin........................................................ 104,155 111,219
Selling, general and administrative expenses........................ 87,092 93,292
---------------- ----------------
Operating income.................................................... 17,063 17,927
Interest expense, net............................................... 263 379
---------------- ----------------
Earnings before income taxes........................................ 16,800 17,548
Provision for income taxes.......................................... 6,342 6,536
---------------- ----------------
Net earnings........................................................ $ 10,458 $ 11,012
================ ================
Net earnings per share:
Basic............................................................. $ 0.25 $ 0.28
================ ================
Diluted........................................................... $ 0.25 $ 0.28
================ ================
Weighted average shares outstanding:
Basic............................................................. 41,058 39,632
================ ================
Diluted........................................................... 41,512 39,709
================ ================
See Notes to Consolidated Financial Statements.
3
THE MEN'S WEARHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE QUARTER ENDED
-------------------------------
MAY 4, MAY 3,
2002 2003
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................................ $ 10,458 $ 11,012
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization............................ 10,654 12,604
Gain on sale of assets................................... -- (4,381)
Deferred tax provision................................... 2,005 435
Increase in inventories.................................. (5) (27,149)
Increase in other assets................................. (3,804) (4,102)
Increase in accounts payable and accrued expenses........ 33 10,454
(Decrease) increase in income taxes payable.............. (294) 4,745
Increase (decrease) in other liabilities................. 73 (53)
-------------- --------------
Net cash provided by operating activities........... 19,120 3,565
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (13,007) (8,798)
Net proceeds from sale of assets............................ 6,812 --
Investment in trademarks, tradenames and other assets....... (201) (84)
-------------- --------------
Net cash used in investing activities............... (6,396) (8,882)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock...................... 1,395 179
Deferred financing costs.................................... -- (14)
Principal payments on long-term debt........................ (591) (524)
Purchase of treasury stock.................................. -- (3,062)
-------------- --------------
Net cash provided by (used in) financing activities. 804 (3,421)
-------------- --------------
Effect of exchange rate changes on cash....................... 255 1,809
-------------- --------------
INCREASE (DECREASE) IN CASH................................... 13,783 (6,929)
CASH:
Beginning of period......................................... 38,644 84,924
-------------- --------------
End of period............................................... $ 52,427 $ 77,995
============== ==============
See Notes to Consolidated Financial Statements.
4
THE MEN'S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated financial statements include the
accounts of The Men's Wearhouse, Inc. and its subsidiaries (the "Company").
Except for those discussed below, there have been no significant changes in the
accounting policies of the Company during the periods presented. For a
description of these policies, see Note 1 of Notes to Consolidated Financial
Statements in the Company's Annual Report on Form 10-K for the year ended
February 1, 2003.
Stock Based Compensation -- As permitted by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"), we account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." We have adopted the disclosure-only provisions of
SFAS No. 123 and continue to apply APB Opinion 25 and related interpretations in
accounting for the stock option plans and the employee stock purchase plan. Had
we elected to apply the accounting standards of SFAS No. 123, our net earnings
and net earnings per share would have approximated the pro forma amounts
indicated below (in thousands, except per share data):
FOR THE QUARTER ENDED
---------------------------
MAY 4, MAY 3,
2002 2003
----------- -----------
Net earnings, as reported.........................$ 10,458 $ 11,012
Deduct: Additional compensation expense,
net of tax...................................... (745) (533)
----------- ----------
Pro forma net earnings............................$ 9,713 $ 10,479
=========== ==========
Net earnings per share:
As reported:
Basic...........................................$ 0.25 $ 0.28
Diluted.........................................$ 0.25 $ 0.28
Pro forma:
Basic...........................................$ 0.24 $ 0.26
Diluted.........................................$ 0.23 $ 0.26
Accounting Change -- We adopted Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS 143"), on February 2, 2003. SFAS 143
addresses the accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated retirement costs.
The adoption of this statement did not have a material impact on our financial
position or results of operations.
We adopted Statement of Financial Accounting Standards No. 145, "Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" ("SFAS 145"), on February 2, 2003. SFAS 145 rescinds FASB
Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and
an amendment of that Statement, FASB Statement No. 64, "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements". SFAS 145 also rescinds FASB
Statement No. 44, "Accounting for Intangible Assets of Motor Carriers". In
addition, SFAS 145 amends FASB Statement No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
statement also makes non-substantive technical corrections to existing
pronouncements. The adoption of this statement did not have a material impact on
our financial position or results of operations.
We adopted Statement of Financial Accounting Standards No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities" ("SFAS 146"), on November
3, 2002. SFAS 146 replaces EITF No. 94-3, "Liability Recognition for
5
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS 146 requires, among
other things, that a liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred rather than when a company
commits to such an activity and also establishes fair value as the objective for
initial measurement of the liability. The adoption of this statement did not
have a material impact on our financial position or results of operations.
We adopted Statement of Financial Accounting Standards No. 148, "Accounting
for Stock-Based Compensation-Transition and Disclosure" ("SFAS 148"), as of
February 1, 2003. SFAS 148 amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. Additionally, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The adoption of the disclosure requirements of SFAS 148 did not have a
material effect on the Company's financial position or results of operations.
The disclosures required by SFAS 148 are included as part of this note under the
caption "Stock Based Compensation."
In November 2002, the FASB issued Financial Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires that
upon issuance of a guarantee, the guarantor must disclose and recognize a
liability for the fair value of the obligation it assumes under that guarantee.
The initial recognition and measurement requirement of FIN 45 is effective for
guarantees issued or modified after December 31, 2002. The disclosure
requirements of FIN 45 are effective for interim and annual periods ending after
December 15, 2002 and are applicable to guarantees issued before December 31,
2002. The adoption of FIN 45 did not have a material impact on our financial
position or results of operations.
In November 2002, the Emerging Issues Task Force ("EITF") issued Issue
02-16, "Accounting by a Customer (Including a Reseller) for Cash Consideration
Received from a Vendor." This EITF addresses the accounting treatment for cash
vendor allowances received. The adoption of EITF Issue 02-16 in 2003 did not
have an impact on the Company's financial position or results of operations as
we do not receive any material vendor allowances.
New Accounting Pronouncements -- In January 2003, the Financial Accounting
Standards Board issued Financial Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 requires that if an entity
has a controlling financial interest in a variable interest entity, the assets,
liabilities and results of activities of the variable interest entity should be
included in the consolidated financial statements of the entity. FIN 46 requires
that its provisions are effective immediately for all arrangements entered into
after January 31, 2003. We do not have any variable interest entities created
after January 31, 2003. For any arrangements entered into prior to January 31,
2003, the FIN 46 provisions are required to be adopted at the beginning of the
first interim or annual period beginning after June 15, 2003. The adoption of
FIN 46 is not expected to have a material impact on our financial position or
results of operations.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS 149"). SFAS 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). This statement is effective for contracts entered into
or modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. The adoption of this statement is not expected to have a material
impact on our financial position or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments, many of which were
previously classified as equity. This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of this statement is not expected to have a material impact
on our financial position or results of operations.
6
2. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed using the weighted average
number of common shares outstanding during the period and net earnings. Diluted
EPS gives effect to the potential dilution which would have occurred if
additional shares were issued for stock options exercised under the treasury
stock method. Diluted EPS also gives effect to the potential dilution of any put
options outstanding, computed using the reverse treasury stock method.
3. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
In connection with our direct sourcing program, we may enter into purchase
commitments that are denominated in a foreign currency (primarily the Euro). Our
policy is to enter into foreign currency forward exchange contracts to minimize
foreign currency exposure related to forecasted purchases of certain
inventories. Under SFAS 133, such contracts have been designated as and
accounted for as cash flow hedges. The settlement terms of the forward
contracts, including amount, currency and maturity, correspond with payment
terms for the merchandise inventories. Any ineffective portion of a hedge is
reported in earnings immediately. At May 3, 2003, the Company had 18 contracts
maturing in varying increments to purchase an aggregate notional amount of $17.2
million in foreign currency, maturing at various dates through January 2004.
The changes in the fair value of the foreign currency forward exchange
contracts are matched to inventory purchases by period and are recognized in
earnings as such inventory is sold. The fair value of the forward exchange
contracts is estimated 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 quarter end. We expect to recognize in earnings through January 31, 2004
approximately $0.3 million, net of tax, of existing net gains presently deferred
in accumulated other comprehensive income.
4. COMPREHENSIVE INCOME AND SUPPLEMENTAL CASH FLOWS
Our comprehensive income is as follows (in thousands):
FOR THE QUARTER ENDED
--------------------------
MAY 4, MAY 3,
2002 2003
---------- ---------
Net earnings................................... $ 10,458 $ 11,012
Change in derivative fair value, net of tax.... 723 173
Currency translation adjustments, net of tax... 793 4,641
---------- ---------
Comprehensive income........................... $ 11,974 $ 15,826
========== =========
We paid cash during the first quarter of 2002 of $0.6 million for interest
and $3.5 million for income taxes, compared with $0.5 million for interest and
$1.6 million for income taxes during the first quarter of 2003. We had non-cash
investing and financing activities resulting from the tax benefit recognized
upon exercise of stock options of $0.5 million and $0.0 million for the first
quarters of 2002 and 2003, respectively, and from the issuance of treasury stock
to the employee stock ownership plan of $0.5 million in the first quarter of
2003. No issuance of treasury stock to the employee stock ownership plan
occurred during the first quarter of 2002.
7
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangibles are included in other assets in the
accompanying balance sheet. Changes in the net carrying amount of goodwill for
the year ended February 1, 2003 and for the three months ended May 3, 2003 are
as follows (in thousands):
Balance, February 2, 2002.......................................... $ 35,561
Goodwill of acquired business................................. 233
Translation adjustment........................................ 813
--------
Balance, February 1, 2003.......................................... $ 36,607
Translation adjustment........................................ 1,319
--------
Balance, May 3, 2003............................................... $ 37,926
========
The gross carrying amount and accumulated amortization of our other
intangibles are as follows (in thousands):
MAY 4, MAY 3, FEBRUARY 1,
2002 2003 2003
------------ ------------ --------------
Trademarks, tradenames and
other intangibles.......... $ 5,465 $ 7,908 $ 7,958
Accumulated amortization..... (1,435) (1,874) (1,771)
------------ ------------ --------------
Net total............... $ 4,030 $ 6,034 $ 6,187
============ ============ ==============
The pretax amortization expense associated with intangible assets totaled
approximately $85,000 and $154,000 for the quarters ended May 4, 2002 and May 3,
2003, respectively, and approximately $428,000 for the year ended February 1,
2003. Pretax amortization associated with intangible assets at May 3, 2003 is
estimated to be $461,000 for the remainder of fiscal year 2003, $615,000 for
each of the fiscal years 2004 through 2005, $577,000 for fiscal year 2006 and
$455,000 for fiscal year 2007.
8
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, 2003. 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 "2003" mean the 52-week
fiscal year ending January 31, 2004.
The following table presents information with respect to stores in
operation during each of the respective fiscal periods.
FOR THE QUARTER ENDED YEAR ENDED
---------------------- ------------
MAY 4, MAY 3, FEBRUARY 1,
2002 2003 2003
-------- --------- ------------
Stores open at beginning of period... 680 689 680
Opened............................. 8 -- 16
Closed............................. -- (5) (7)
---- ----- -----
Stores open at end of period......... 688 684 689
=== === ===
Stores open at end of period:
U.S. --
Men's Wearhouse.................. 504 505 505
K&G.............................. 71 65 70
---- ---- ----
575 570 575
Canada -- Moores................... 113 114 114
---- ---- ----
688 684 689
==== ==== ====
RESULTS OF OPERATIONS
Quarter Ended May 4, 2002 and May 3, 2003
Our net sales were $313.1 million for the quarter ended May 3, 2003, a $9.3
million or 3.0% increase from the same prior year period. This increase was due
primarily to a 1.0% increase in U.S. comparable store sales (which are
calculated primarily by excluding the net sales of a store for any month of one
period if the store was not open throughout the same month of the prior period).
The increase in comparable sales for the U.S. stores was due mainly to continued
growth in our tuxedo rental business, which increased from 2.3% of total
revenues in the first quarter of 2002 to 4.1% of total revenues in the first
quarter of 2003. A decrease of 8.7% in comparable sales for the Canadian stores,
due mainly to unusually severe and extended winter weather conditions, was
largely offset by the foreign currency exchange rate translation effect from the
strengthening of the Canadian dollar.
Gross margin increased 6.8% from the same prior year quarter to $111.2
million in the first quarter of 2003. As a percentage of sales, gross margin
increased from 34.3% in the first quarter of 2002 to 35.5% in the first quarter
of 2003. This increase in gross margin predominately resulted from continued
growth in our tuxedo rental business, which carries a significantly higher
incremental gross margin impact than our traditional businesses. In addition,
our shift in 2002 to merchandise with lower opening price points at our Men's
Wearhouse brand has resulted in improved initial markups and product margins.
Selling, general and administrative ("SG&A") expenses, as a percentage of
sales, were 28.7% for the first quarter of 2002, compared to 29.8% for the first
quarter of 2003, with SG&A expenditures increasing by $6.2 million or 7.1% to
$93.3 million. On an absolute dollar basis, the principal components of SG&A
expenses increased primarily due to our planned increase in advertising and
continued growth in our tuxedo rental business. First quarter 2003 SG&A expenses
were reduced by the recognition of a $4.4 million deferred pretax gain from the
sale, in March 2002, of substantially all of the assets of
9
Chelsea Market Systems, L.L.C. ("Chelsea") to an unrelated company regularly
engaged in the development and licensing of software to the retail industry.
However, most of the gain recognized was offset by $3.7 million in costs related
to store closures and the write-off of certain technology assets. As a
percentage of sales, advertising expense increased from 4.2% to 4.5% of net
sales, store salaries increased from 11.9% to 12.1% of net sales and other SG&A
expenses increased from 12.6% to 13.2% of net sales.
Interest expense, net of interest income, was $0.3 million for the first
quarter of 2002, compared with $0.4 million in the first quarter of 2003.
Weighted average borrowings outstanding increased from $40.2 million in the
first quarter of 2002 to $41.9 million in the first quarter of 2003, and the
weighted average interest rate on outstanding indebtedness increased from 4.2%
to 5.8%. The increase in the weighted average borrowings was due primarily to
increases in the Canadian dollar exchange rate for our Canadian term loan. The
increase in the weighted average interest rate was due primarily to increases in
the LIBOR rate. The effect of these increases from the prior year on interest
expense was offset by an increase in interest income. See "Liquidity and Capital
Resources" discussion herein.
Our effective income tax rate decreased from 37.8% for the first quarter of
2002 to 37.3% for the first quarter of 2003. The effective tax rate was higher
than the statutory U.S. federal rate of 35% primarily due to the effect of state
income taxes.
These factors resulted in net earnings of $11.0 million or 3.5% of net sales
for the first quarter of 2003, compared with net earnings of $10.5 million or
3.4% of net sales for the first quarter of 2002.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $336.9 million at May 3, 2003, which is up from $325.3
million at February 1, 2003 and $316.4 million at May 4, 2002. Historically, our
working capital has been at its lowest level in January and February and has
increased through November as inventory buildup is financed with both vendor
payables and credit facility borrowings in preparation for the fourth quarter
selling season.
Our operating activities provided net cash of $19.1 million in the first
quarter of 2002, due mainly to net earnings adjusted for non-cash charges.
During the first quarter of 2003, our operating activities provided net cash of
$3.6 million, due to net earnings, adjusted for non-cash charges (including
recognition of a deferred gain on the sale of Chelsea assets), increases in
inventories and other assets offset by increases in accounts payable, accrued
expenses and income taxes payable. Inventories increased during the first
quarter of 2003 due to seasonal inventory buildup and the purchase of fabric
used in the direct sourcing of inventory. However, we did not experience this
typical inventory buildup in the first quarter of 2002 as a result of a decrease
in net sales of 4.5% in fiscal 2001 and lower planned inventory purchases based
upon our forecasted net sales for fiscal 2002.
Our investing activities used net cash of $6.4 million and $8.9 million for
the first quarter of 2002 and 2003, respectively. Cash used in investing
activities was primarily comprised of capital expenditures relating to stores
opened, remodeled or relocated during the period or under construction at the
end of the period and infrastructure technology investments. During the first
quarter of 2002, cash used for capital expenditures was partially offset by net
proceeds received from the sale of Chelsea assets.
Our financing activities provided net cash of $0.8 million for the first
quarter of 2002, due mainly to proceeds from the issuance of our common stock in
connection with the exercise of stock options. During the first quarter of 2003,
our financing activities used net cash of $3.4 million, due mainly to purchases
of treasury stock. In January 2000, the Board of Directors authorized a stock
repurchase program for up to one million shares of our common stock, in the open
market or in private transactions, depending on market price and other
considerations. On January 31, 2001, the Board of Directors authorized an
expansion of the stock repurchase program for up to an additional two million
shares of our common stock. No shares were repurchased under this program during
the first quarter of 2002. During the third quarter of 2002, we completed the
repurchase of the authorized three million shares under this program. In
November 2002, the Board of Directors authorized a new program for the
repurchase of up to $25.0 million of Company stock in the open market or in
private transactions. A total of 210,500 shares at a cost of $3.1 million were
repurchased in open market transactions under this new program during the first
quarter of 2003.
10
In January 2003, we replaced our existing $125.0 million revolving credit
facility which was scheduled to mature in February 2004 with a new revolving
credit agreement with a group of banks (the "Credit Agreement") that provides
for borrowing of up to $100.0 million through February 4, 2006. Advances under
the new Credit Agreement bear interest at a rate per annum equal to, at our
option, the agent's prime rate or the reserve adjusted LIBOR rate plus a varying
interest rate margin. The Credit Agreement also provides for fees applicable to
unused commitments. In addition, in January 2003, we entered into a new Canadian
credit facility which is a term credit agreement under which we borrowed
Can$62.0 million (US$43.7 million). The term credit borrowing is payable in
quarterly installments of Can$0.8 million (US$0.6 million) beginning May 2003,
with the remaining unpaid principal payable on February 4, 2008. Borrowings
under the new term credit agreement were used to repay approximately Can$60.9
million (US$42.9 million) in outstanding indebtedness of Moores under the
previous term credit agreement and to fund financing requirements of Moores.
Covenants and interest rates for the term credit agreement are substantially
similar to those contained in the Company's Credit Agreement. As of May 3, 2003,
there was US$43.1 million outstanding under these credit agreements.
The Credit Agreement contains certain restrictive and financial covenants,
including the requirement to maintain a minimum level of net worth and certain
financial ratios. The Credit Agreement also prohibits payment of cash dividends
on our common stock. We are in compliance with the covenants in the Credit
Agreement.
We anticipate that our existing cash and cash flow from operations,
supplemented by borrowings under our credit agreements, will be sufficient to
fund our planned store openings, other capital expenditures and operating cash
requirements for at least the next 12 months.
In connection with our direct sourcing program, we may enter into purchase
commitments that are denominated in a foreign currency (primarily the Euro). We
generally enter into forward exchange contracts to reduce the risk of currency
fluctuations related to such commitments. As these forward exchange contracts
are with two 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. We may also
be exposed to market risk as a result of changes in foreign exchange rates. This
market risk should be substantially offset by changes in the valuation of the
underlying transactions.
FORWARD-LOOKING STATEMENTS
Certain statements made herein and in other public filings and releases by
the Company contain "forward-looking" information (as defined in the Private
Securities Litigation Reform Act of 1995) that involve risk and uncertainty.
These forward-looking statements may include, but are not limited to, future
capital expenditures, acquisitions (including the amount and nature thereof),
future sales, earnings, margins, costs, number and costs of store openings,
demand for men's clothing, market trends in the retail men's clothing business,
currency fluctuations, inflation and various economic and business trends.
Forward-looking statements may be made by management orally or in writing,
including but not limited to, the Management's Discussion and Analysis of
Financial Condition and Results of Operations section and other sections of the
Company's filings with the Securities and Exchange Commission under the
Securities Exchange Act of 1934 and the Securities Act of 1933.
Actual results and trends in the future may differ materially depending on a
variety of factors including, but not limited to, domestic and international
economic activity and inflation, our successful execution of internal operating
plans and new store and new market expansion plans, performance issues with key
suppliers, severe weather, foreign currency fluctuations, government export and
import policies 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.
11
ITEM 3 - QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to exposure from fluctuations in U.S. dollar/Euro exchange
rates and the Canadian dollar/Euro exchange rates. As further described in Note
3 of Notes to Consolidated Financial Statements and "Management's Discussion and
Analysis of Financial Information and Results of Operations - Liquidity and
Capital Resources", we utilize foreign currency forward exchange contracts to
limit exposure to changes in currency exchange rates. At May 3, 2003, we had 18
contracts maturing at various dates through January 2004. Unrealized pretax
gains on these forward contracts totaled approximately $0.4 million at May 3,
2003. A hypothetical 10% change in applicable May 3, 2003 forward rates could
increase or decrease this pretax gain by $1.7 million related to these
positions. However, it should be noted that any change in the value of these
contracts, whether real or hypothetical, would be significantly offset by an
inverse change in the value of the underlying hedged item.
Moores conducts its business in Canadian dollars. The exchange rate between
Canadian dollars and U.S. dollars has fluctuated over the last ten years. If the
value of the Canadian dollar against the U.S. dollar weakens, then the revenues
and earnings of our Canadian operations will be reduced when they are translated
to U.S. dollars. Also, the value of our Canadian net assets in U.S. dollars may
decline.
ITEM 4 - CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within 90 days prior to the filing of this report, under the supervision
and with the participation of the Company's management, including the Company's
Chief Executive Officer (CEO) and Chief Financial Officer (CFO), an evaluation
of the effectiveness of the Company's disclosure controls and procedures was
performed. Based on this evaluation, the CEO and CFO have concluded that the
Company's disclosure controls and procedures are effective to ensure that
material information is recorded, processed, summarized and reported by
management of the Company on a timely basis in order to comply with the
Company's disclosure obligations under the Securities Exchange Act of 1934 and
the SEC rules thereunder.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation.
12
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The previously disclosed lawsuit filed against the Company in the Superior
Court of California for the County of San Diego, Cause No. GIC 767223, alleging
several causes of action based on the factual allegation that we advertised and
sold men's slacks at a marked price that was exclusive of a hemming fee for the
pants, has been settled by the parties on terms acceptable to the Company.
On April 18, 2003, a lawsuit was filed against the Company in the Superior
Court of California for the County of Orange, Case No. 03CC00132 (the "Orange
County Suit"). On April 21, 2003, a lawsuit was filed against K&G Men's Center,
Inc. and K&G Men's Company Inc. (collectively, "K&G"), wholly owned subsidiaries
of the Company, in the Los Angeles Superior Court of California, Case No.
BC294361 (the "Los Angeles County Suit"; the Los Angeles County Suit and the
Orange County Suit shall be referred to jointly as the "Suits").
The Orange County Suit was brought as a purported class action. The Los
Angeles County Suit was brought as a multi-party action. Both Suits allege
several causes of action, each based on the factual allegation that in the State
of California the Company and K&G misclassified its managers and assistant
managers as exempt from the application of certain California labor statutes.
Because of this alleged misclassification, the Suits allege that the Company and
K&G failed to pay overtime compensation and provide the required rest periods to
such employees. The Suits seek, among other things, declaratory and injunctive
relief along with an accounting as to alleged wages, premium pay, penalties,
interest and restitution allegedly due the class defendants. We believe that our
managers and assistant managers were properly classified as exempt under such
statutes and, therefore, properly compensated. The Company believes that the
Suits are without merit and intends to vigorously defend them.
On April 23, 2003, a lawsuit was filed against K&G in the Los Angeles
Superior Court of California, Case No. BC294497 (the "Tailor's Suit"). The
Tailor's Suit was brought as a multi-party action. The Tailor's Suit alleges
several causes of action, each based on the factual allegation that in the State
of California K&G misclassified the tailors working in their stores as
"independent contractors" and refused to classify them as non-exempt employees
subject to the application of certain California labor statutes. Because of this
alleged misclassification, the Tailor's Suit alleges that K&G failed to pay
hourly and overtime compensation and provide the required rest periods required
by such labor statutes. The Tailor's Suit further alleges that K&G violated
several other labor statutes and regulations as well as the California Unfair
Competition Law. It seeks, among other things, restitution, disgorgement due to
failure to comply with California labor laws, penalties, declaratory and
injunctive relief. We believe that the tailors were properly classified as
independent contractors and properly compensated pursuant to the terms of their
respective Independent Contractor Agreements. The Company believes that the
Tailor's Suit is without merit and intends to vigorously defend the lawsuit.
In addition, we are involved in various routine legal proceedings, including
ongoing litigation, incidental to the conduct of our business. Management
believes that none of these matters will have a material adverse effect on our
financial condition or results of operations.
13
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS.
Exhibit
Number Exhibit Index
99.1 -- Certification of Periodic Report Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
by the Chief Executive Officer (filed herewith).
99.2 -- Certification of Periodic Report Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
by the Chief Financial Officer (filed herewith).
(B) REPORTS ON FORM 8-K.
On May 22, 2003, the Company filed a current report on Form 8-K pursuant to
item 12 reporting the issuance of a press release that reported results for the
first fiscal quarter of 2003.
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 17, 2003 THE MEN'S WEARHOUSE, INC.
By /s/ NEILL P. DAVIS
------------------------------
Neill P. Davis
Executive Vice President,
Chief Financial Officer
and Principal Financial Officer
14
I, George Zimmer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Men's Wearhouse,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: June 17, 2003
By /s/ GEORGE ZIMMER
----------------------------
George Zimmer
Chairman of the Board
and Chief Executive Officer
15
I, Neill P. Davis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Men's Wearhouse,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: June 17, 2003
By /s/ NEILL P. DAVIS
-----------------------------
Neill P. Davis
Executive Vice President,
Chief Financial Officer
and Principal Financial Officer
16
Exhibit Index
99.1 -- Certification of Periodic Report Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
by the Chief Executive Officer (filed herewith).
99.2 -- Certification of Periodic Report Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
by the Chief Financial Officer (filed herewith).