================================================================================UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549FORM 10-K
(Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
(Mark One) þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year endedJanuary
31, 200429, 2005 or[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from
____________ to__________ COMMISSION FILE NUMBERtoCommission file number 1-16097THE
MEN'SMEN’S WEARHOUSE, INC.(Exact(Exact Name of Registrant as Specified in its Charter)TEXAS 74-1790172 (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification Number) 5803 GLENMONT DRIVE 77081-1701 HOUSTON, TEXAS (Zip Code) (Address of Principal Executive Offices)
Texas
(State or Other Jurisdiction of
Incorporation or Organization)74-1790172
(IRS Employer
Identification Number)5803 Glenmont Drive
Houston, Texas
(Address of Principal Executive Offices)77081-1701
(Zip Code)(713) 592-7200
(Registrant's
(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class on which registered ------------------- ------------------- COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
Title of each class
Common Stock, par value $.01 per shareName of each exchange
on which registered
New York Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act:
NONENone
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]þ. No[ ].o.Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the
registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[X]þIndicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes
[X]þ. No[ ].o.The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing price of shares of common stock on the New York Stock Exchange on
August 2, 2003,July 31, 2004, was approximately$829.7$812.0 million.The number of shares of common stock of the registrant outstanding on April
9, 200425, 2005 was36,102,07135,965,299 excluding6,979,4238,315,494 shares classified as Treasury Stock.DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT INCORPORATED AS TO -------- ------------------Document Incorporated as to Notice and Proxy Statement for the Annual Meeting of Part III: Items 10,11,12 and 13
Shareholders scheduled to be held June30, 2004.29, 2005.Part III: Items 10,11,12, 13
and 14FORM 10-K REPORT INDEX
10-K PART AND ITEM NO. PAGE NO. - ---------------------- --------Part and Item No. Page No. Business 1 Properties 7 Legal Proceedings..............................................................Proceedings9 Submission of Matters to a Vote of Security Holders............................ 10Holders9 Market for the Company'sCompany’s Common Equity and Related StockholderMatters......... 11Matters10 Selected Financial Data........................................................ 12Data11 Management’s Discussion and Analysis of Financial Condition and Results of Operations..................................................................... 14Operations13 Quantitative and Qualitative Disclosures About Market Risk.....................Risk24 Financial Statements and Supplementary Data....................................Data25 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................................................... 43Disclosure49 Controls and Procedures........................................................ 43Procedures49 Other Information 49 Directors and Executive Officers of the Company................................ 43Company49 Executive Compensation......................................................... 43Compensation49 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters............................................................ 43Matters50 Certain Relationships and Related Transactions................................. 43Transactions50 Principal Accountant Fees and Services......................................... 43Services50 Exhibits and Financial Statement Schedules and Reports on Form 8-K................ 4451 2004 Long-Term Incentive Plan Subsidiaries of the Company Consent of Deloitte & Touch LLP, independent auditors Certification of Annual Report Pursuant to Sec. 302 Certification of Annual Report Pursuant to Sec. 302 Certification of Annual Report Pursuant to Sec. 906 Certification of Annual Report Pursuant to Sec. 906 PART I
ITEM 1. BUSINESS
GENERALGeneral
The
Men'sMen’s Wearhouse began operations in 1973 as a partnership and was incorporated as TheMen'sMen’s Wearhouse, Inc. (the"Company"“Company”) under the laws of Texas in May 1974. Our principal corporate and executive offices are located at 5803 Glenmont Drive, Houston, Texas 77081-1701 (telephone number 713/592-7200), and at 40650 Encyclopedia Circle, Fremont, California 94538-2453 (telephone number 510/657-9821), respectively. Unless the context otherwise requires,"Company"“Company”,"we"“we”,"us"“us” and"our"“our” refer to TheMen'sMen’s Wearhouse, Inc. and its wholly owned or controlled subsidiaries.Our website address is
www.menswearhouse.com.www.menswearhouse.com. Through the investor relations section of our website, we provide free access to our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission("SEC"(“SEC”). The SEC also maintains a website that contains theCompany'sCompany’s filings atwww.sec.gov. THE COMPANYwww.sec.gov.The Company
We are one of the largest specialty retailers of
men'smen’s suits in the United States and Canada. At January31, 2004,29, 2005, our U.S. operations included579593 retail apparel stores in 44 states and the District of Columbia, primarily operating under the brand names ofMen'sMen’s Wearhouse and K&G, with approximately25%23% of our locations in Texas and California. At January31, 2004,29, 2005, our Canadian operations included 114 retail apparel stores in 10 provinces operating under the brand name of Moores Clothing for Men. Below is a brief description of our brands:Men'sMen’s Wearhouse
Under the
Men'sMen’s Wearhouse brand, we target middle and upper-middle income men by offering quality merchandise at everyday low prices. In addition to value, we believe we provide a superior level of customer service.Men'sMen’s Wearhouse stores offer a broad selection of designer, brand name and private label merchandise at prices we believe are typically 20% to 30% below the regular prices found at traditional department and specialty stores. Our merchandise includes suits, sport coats, slacks, formal wear, business casual, sportswear, outerwear, dress shirts, shoes and accessories. We concentrate on business attire that is characterized by infrequent and more predictable fashion changes. Therefore, we believe we are not as exposed to trends typical of more fashion-forward apparel retailers, where significant markdowns and promotional pricing are more common. At January31, 2004,29, 2005, we operated506 Men's517 Men’s Wearhouse stores in 44 states and the District of Columbia. These stores are referred to as"Men's“Men’s Wearhousestores"stores” or"traditional stores"“traditional stores”.We also began a tuxedo rental program in selected
Men'sMen’s Wearhouse stores during1999.1999 and now offer tuxedo rentals in substantially all of our Men’s Wearhouse stores. We believe this program generates incremental business for us without significant incremental personnel or real estate costs and broadens our customer base by drawing first-time and younger customers into our stores.We completed the rollout of this program to our traditional stores during the first quarter of fiscal 2002 and now offer tuxedo rentals in substantially all of our Men's Wearhouse stores.K&G
Under the K&G brand, we target the more price sensitive customer.
The K&G brand was acquired as a result of our combination with K&G Men's Center, Inc. in June 1999.At January31, 2004,29, 2005, we operated7376 K&G stores in2325 states, whichincludes fiveinclude four stores operating under the name The Suit Warehouse(four in(in the metropolitan DetroitMichigan area and one in Toledo, Ohio)area).Thirty-fiveForty-three of the K&G stores offerladies'ladies’ career apparel that is also targeted to the more price sensitive customer.We believe that K
&G's&G’s morebasic,value-oriented superstore approach appeals to certain customers in the apparel market. K&G offers first-quality, current-season apparel and accessories comparable in quality to that of traditional department and specialty stores, at everyday low prices we believe are typically 30% to 70% below the regular prices charged by such stores. K&G's&G’s merchandising strategy emphasizes broad assortments across all major categories, including tailored clothing, casual sportswear, dress furnishings, footwear and accessories. This merchandise selection, which includes brand name as well as private label merchandise, positions K&G to attract a1wide range of customers in each of its markets. As with the Men'sMen’s Wearhouse brand, K&G's&G’s philosophy of delivering everyday value distinguishes K&G from other retailers that adopt a more promotional pricing strategy.1
Moores
Under the Moores brand, we target middle and upper-middle income men in Canada by offering quality merchandise at everyday low prices. Moores
which was acquired as a result of our combination with Moores Retail Group Inc. in February 1999,is one ofCanada'sCanada’s leading specialty retailers ofmen'smen’s suits, with 114 retail apparel stores in 10 Canadian provinces at January31, 2004.29, 2005. Similar to theMen'sMen’s Wearhouse stores, Moores stores offer a broad selection of quality merchandise at prices we believe are typically 20% to 30% below the regular prices charged by traditional Canadian department and specialty stores. Moores focuses on conservative, basic tailored apparel that we believe limits exposure to changes in fashion trends and the need for significant markdowns.Moores'Moores’ merchandise consists of suits, sport coats, slacks, business casual, dress shirts, sportswear, outerwear, shoes and accessories.In October 2003, we extended our tuxedo rental program to our Moores
stores,stores. During the first quarter of fiscal 2004, we completed the rollout of this program andas of January 31, 2004, offeredbegan to offer tuxedo rentalsin 48at all of our Moores stores.Subsequent to year end, the tuxedo program has been extended to the remainder of the Moores stores.Moores distinguishes itself from other Canadian retailers of menswear by manufacturing a significant portion of the tailored clothing for sale in its stores. Moores conducts its manufacturing operations through its wholly owned subsidiary, Golden Brand Clothing (Canada) Ltd.
("(“GoldenBrand"Brand”), which is the second largest manufacturer ofmen'smen’s suits and sport coats in Canada. GoldenBrand'sBrand’s manufacturing facility in Montreal, Quebec, includes a cutting room, fusing department, pant shop and coat shop. At full capacity, the coat shop can produce 13,000 units per week and the pant shop can produce 23,000 units per week.As a result of the vertical integration and the related cost savings, Moores is able to provide greater value to its customer by offering a broad selection of quality merchandise at everyday low prices, which the Company believes typically range from 20% to 30% below the regular prices charged by traditional Canadian department and specialty stores.Beginning in 1999, Golden Brand also manufactures product forMen'sMen’s Wearhouse stores.EXPANSION STRATEGY Our expansion strategy includes: - opening additional Men's Wearhouse and K&G stores in new and existing markets, - expanding our tuxedo rental program to Moores stores, - testing opportunities to market complementary products and services, - testing expanded, more fashion-oriented merchandise concepts, and -Expansion Strategy
Our expansion strategy includes: • opening additional Men’s Wearhouse, K&G and Moores stores in new and existing markets, • testing opportunities to market complementary products and services, • expanding our corporate apparel program, and • identifying strategic acquisition opportunities, including but not limited to international opportunities. In general terms, we consider a geographic area served by a common group of television stations as a single market.
On a limited basis, we have acquired store locations, inventories, customer lists, trademarks and tradenames from existing menswear retailers in both new and existing markets. We may do so again in the future. At present, in
20042005 we plan to open approximatelyeleven15 newMen'sMen’s Wearhouse stores,and eightsix new K&G stores and two Moores stores, to closeapproximately six Men's Wearhousetwo K&G stores andfour K&G stores,to expand and/or relocate approximatelytwelve24 existingMen'sMen’s Wearhouse stores,and onesix existing K&Gstorestores and eight existing Moores stores and to continue expansion in subsequent years. We believe that our ability to increase the number of traditional stores in the United States above 550 will be limited. However, we believe that additional growth opportunities exist through improving and diversifying the merchandise mix, relocating stores, expanding our K&G brand and adding complementary products and services.In connection with our strategy of testing opportunities to market complementary products and services, in December 2003 and in September 2004 we acquired the assets and operating leases for 13 and 11, respectively, retail dry cleaning and laundry facilities operating in the
metropolitanHouston, Texas area. We launched a rebranding campaign for these facilities in March 2005. At present, in 2005 we plan to open five retail dry cleaning and laundry facilities and relocate one facility. We may open or acquire additional facilities on a limited basisduring 2004in 2005 as we continue to test market and evaluate the feasibility of developing a national retail dry cleaning and laundry line of business.As of January 29, 2005, we were operating six new casual clothing/sportswear concept stores that were opened during 2004 in order to test an expanded, more fashion-oriented merchandise concept for men and women. These stores are approximately 3,000 to 3,500 square feet and are located in high-end regional malls. They target the 25 to 35 year old customer with Latin-inspired store designs and offerings. In March 2005, it was determined that no further investments would be made into these fashion-oriented test concept stores and that the six stores operating at January 29, 2005 will be wound down over the course of fiscal 2005.
2
During the fourth quarter of fiscal 2004, we opened two test bridal stores in the San Francisco Bay Area in order to test additional opportunities in the bridal industry. These stores are located contiguous to existing Men’s Wearhouse stores. We may open additional stores on a limited basis in 2005 as we continue to test the market and opportunities in the bridal industry. However, we do not expect these operations or expansion efforts to have a material effect on our financial position, results of operations or cash flows for
2004. 2We also plan to open six new casual clothing/sportswear concept stores in 2004 in order to test an expanded, more fashion-oriented merchandise concept for men and women. These stores will be 3,000 to 3,500 square feet and will be located in high-end regional malls. They will target the 25 to 35 year old customer with Latin-inspired store designs and offerings. We do not expect these operations to have a material effect on our financial position, results of operations or cash flows for 2004. MERCHANDISING2005.Merchandising
Our stores offer a broad selection of designer, brand name and private label
men'smen’s business attire, including a consistent stock of core items (such as navy blazers, tuxedos and basic suits). Although basic styles are emphasized, eachseason'sseason’s merchandise reflects current fabric and color trends, and a small percentage of inventory, accessories in particular, are usually more fashion oriented. The broad merchandise selection creates increased sales opportunities by permitting a customer to purchase substantially all of his tailored wardrobe and accessory requirements, including shoes, at our stores. Within our tailored clothing, we offer an assortment of styles from a variety of manufacturers and maintain a broad selection of fabrics, colors and sizes. Based on the experience and expertise of our management, we believe that the depth of selection offered provides us with an advantage over most of our competitors.The
Company'sCompany’s inventory mix includes"business casual"“business casual” merchandise designed to meet demand for such products resulting from more relaxed dress codes in the workplace. This merchandise consists of tailored and non-tailored clothing (sport coats, casual slacks, knits and woven sports shirts, sweaters and casual shoes) that complements the existing product mix and provides opportunity for enhanced sales without significant inventory risk.We do not purchase significant quantities of merchandise overruns or close-outs. We provide recognizable quality merchandise at consistent prices that assist the customer in identifying the value available at our stores. We believe that the merchandise at
Men'sMen’s Wearhouse and Moores stores is generally offered 20% to 30% below traditional department and specialty store regular prices and that merchandise at K&G stores is generally 30% to 70% below regular retail prices charged by such stores. A ticket is affixed to each item, which displays our selling price alongsidethea price weregard asbelieve reflects the regular, non-promotional price of the item at traditional department and specialty stores.By targeting
men'smen’s business attire, a category ofmen'smen’s clothing characterized by infrequent and more predictable fashion changes, we believe we are not as exposed to trends typical of more fashion-forward apparel retailers. This allows us to carry basic merchandise over to the following season and reduces the need for markdowns; for example, a navy blazer or gray business suit may be carried over to the next season. OurMen'sMen’s Wearhouse and Moores stores have an annual sale that starts around Christmas and runs through the month of January, during which prices on many items are reduced 20% to 50% off the everyday low prices. This sale reduces stock at year-end and prepares for the arrival of the newseason'sseason’s merchandise. We also have a similar event in mid-summer; however, the level of advertising for promotion of the summer event is lower than that for the year-end event.During
2001,2002, 2003 and2003, 56.8%2004, 56.5%,56.5%55.2% and55.2%54.4%, respectively, of our total net merchandise sales were attributable to tailored clothing (suits, sport coats and slacks) and43.2%43.5%,43.5%44.8% and44.8%45.6%, respectively, were attributable to casual attire, sportswear, shoes, shirts, ties, outerwear and other.In addition to accepting cash, checks or nationally recognized credit cards, we offer our own private label credit card to
Men'sMen’s Wearhousecustomersandin May 2002, we introduced a private label credit card to ourMoores customers. We have contracted with a third-party vendor to provide all necessary servicing and processing and to assume all credit risks associated with a private label credit card program. We believe that the private label credit card provides us with an important tool for targeted marketing and presents an excellent opportunity to communicate with our customers. Beginning in September 2004, all purchases made with the private label credit card at Men’s Wearhouse stores are entitled to a 5% discount. We believe that this change in our private label credit card under our Men’s Wearhouse brand will continue to provide us with an excellent opportunity to develop relationships with our customers. During2003,2004, our customers used the private label credit card for approximately16%17% of our sales atthe Men'sMen’s Wearhousebrandstores and approximately10%15% of our sales at Moores stores.We also offer loyalty programs to our Men’s Wearhouse and Moores customers. Under the loyalty programs, customers receive points for purchases. Points are equivalent to dollars spent on a one-for-one basis, excluding any sales tax dollars. Upon reaching 500 points, customers are issued a $50 rewards certificate which they may use to make purchases at Men’s Wearhouse or Moores stores. We believe that the loyalty programs allow us to cultivate
3
long-term relationships with our customers. At the Men’s Wearhouse, all customers who register for our “Perfect Fit” loyalty program are eligible to participate and earn points for purchases. At Moores, the loyalty program points are earned only on purchases made with the Moores
brand. CUSTOMER SERVICE AND MARKETINGprivate label credit card. Prior to September 2004, the loyalty program points at Men’s Wearhouse were also limited to purchases made with the Men’s Wearhouse private label credit card.Customer Service and Marketing
The
Men'sMen’s Wearhouse and Moores sales personnel are trained as clothing consultants to provide customers with assistance and advice on their apparel needs, including product style, color coordination, fabric choice and garment fit. For example, clothing consultants atMen'sMen’s Wearhouse stores attend an intensive training program at our training facility in Fremont, California, which is further supplemented with weekly store meetings, periodic merchandise meetings and frequent interaction with all levels of store management.3We encourage our clothing consultants to be friendly and knowledgeable and to promptly greet each customer entering the store. Consultants are encouraged to offer guidance to the customer at each stage of the decision-making process, making every effort to earn the
customer'scustomer’s confidence and to create a professional relationship that will continue beyond the initial visit. Clothing consultants are also encouraged to contact customers after the purchase or pick-up of tailored clothing to determine whether customers are satisfied with their purchases and, if necessary, to take corrective action. Store personnel as well as Men’s Wearhouse customer services representatives operating from our corporate offices have full authority to respond to customer complaints and reasonable requests, including the approval of returns, exchanges, refunds, re-alterations and other special requests, all of which we believe helps promote customer satisfaction and loyalty.K&G stores are designed to allow customers to select and purchase apparel by themselves. For example, each merchandise category is clearly marked and organized by size, and suits are specifically tagged
"Athletic“Athletic Fit," "Double-Breasted," "Three” “Double-Breasted,” “Three Button,"” etc., as a means of further assisting customers to easily select their styles and sizes. K&G employees assist customers with merchandise selection, including correct sizing.Each of our stores provides on-site tailoring services to facilitate timely alterations at a reasonable cost to customers. Tailored clothing purchased at a
Men'sMen’s Wearhouse store will be pressed and re-altered (if the alterations were performed at aMen'sMen’s Wearhouse store) free of charge for the life of the garment.Because management believes that men prefer direct and easy store access, we attempt to locate our stores in regional strip and specialty retail centers or in freestanding buildings to enable customers to park near the entrance of the store.
Our total annual advertising expenditures, which were
$61.2 million,$60.1 million,and$62.9 million and $60.5 million in2001,2002, 2003 and2003,2004, respectively, are significant. The Company advertises principally on television and radio, which we consider the most effective means of attracting and reaching potential customers, and our advertising campaign is designed to reinforce our various brands.PURCHASING AND DISTRIBUTIONPurchasing and Distribution
We purchase merchandise from approximately 700 vendors. In
2003,2004, no vendor accounted for 10% or more of purchases. Management does not believe that the loss of any vendor would significantly impact us. While we have no material long-term contracts with our vendors, we believe that we have developed an excellent relationship with our vendors, which is supported by consistent purchasing practices.We believe we obtain favorable buying opportunities relative to many of our competitors. We do not request cooperative advertising support from manufacturers, which reduces the
manufacturers'manufacturers’ costs of doing business with us and enables them to offer us lower prices. Further, we believe we obtain better discounts by entering into purchase arrangements that provide for limited return policies, although we always retain the right to return goods that are damaged upon receipt or determined to be improperly manufactured. Finally, volume purchasing of specifically planned quantities purchased well in advance of the season enables more efficient production runs by manufacturers who, in turn, generally pass some of the cost savings back to us.We purchase a significant portion of our inventory through a direct sourcing program. In addition to finished product, we purchase fabric from mills and contract with certain factories for the assembly of the finished product to be sold in our U.S. and Canadian stores. Our direct sourcing arrangements for fabric and assembly have been with both domestic and foreign mills and factories. During
2001,2002, 2003 and2003,2004, product procured through the direct4
sourcing program represented approximately
28%27%,27%30% and 30%, respectively, of total inventory purchases for stores operating in the U.S. We expect that purchases through the direct sourcing program will represent approximately35%32% of total U.S. purchases in2004.2005. During2001,2002, 2003 and2003,2004, our manufacturing operations at Golden Brand provided47%43%,43%34% and34%32%, respectively, of inventory purchases for Moores stores and5%8%,8%9% and9%10% during2001,2002, 2003 and2003,2004, respectively, of inventory purchases forMen'sMen’s Wearhouse stores.To protect against currency exchange risks associated with certain firmly committed and certain other probable, but not firmly committed, inventory transactions denominated in a foreign currency (primarily the Euro), we enter into forward exchange contracts. In addition, many of the purchases from foreign vendors are
financedsecured by letters of credit.We have entered into license agreements with a limited number of parties under which we are entitled to use designer labels such as
"Gary Player(R)"“Gary Player®” and nationally recognized brand labels such as"Botany(R)"“Botany®” and"Botany 500(R)"“Botany 500®” in return for royalties paid to the licensor based on the costs of the relevant product. These license agreements generally limit the use of the individual label to products of a specific nature (such asmen'smen’s suits,men's 4men’s formal wear or men'smen’s shirts). The labels licensed under these agreements will continue to be used in connection with a portion of the purchases under the direct sourcing program described above, as well as purchases from other vendors. We monitor the performance of these licensed labels compared to their cost and may elect to selectively terminate any license, as provided in the respective agreement. We have also purchased several trademarks, including"Cricketeer(R)“Cricketeer®," "Joseph” “Joseph &Feiss(R)Feiss®," "Baracuta(R)"” “Baracuta®”,"Pronto Uomo(R)“Pronto Uomo®," "Linea Uomo(R)” “Linea Uomo®,"” and"Twinhill(R)“Twinhill®,"” which are used similarly to our licensedlabels.labels.Because of the continued consolidation in themen'smen’s tailored clothing industry, we may be presented with opportunities to acquire or license other designer or nationally recognized brand labels.All merchandise for
Men'sMen’s Wearhouse stores is received into our central warehouse located in Houston, Texas. Merchandise for a store is picked and then moved to the appropriate staging area for shipping. In addition to the central distribution center in Houston, we have space within certainMen'sMen’s Wearhouse stores or separate hub warehouse facilities in the majority of our markets, which function as redistribution facilities for their respective areas. Most purchased merchandise for Moores and K&G stores is direct shipped by vendors to the stores. However, in fiscal 2005 our K&G stores will begin to receive merchandise consistent with our Men’s Wearhouse stores from our central warehouse located in Houston, Texas. This transition of the receipt of merchandise for our K&G stores is targeted for completion in the third quarter of fiscal 2005.We lease and operate
2624 long-haul tractors and6054 trailers, which, together with common carriers, are used to transport merchandise from the vendors to our distribution facilities and from the distribution facilities toMen'sMen’s Wearhouse stores within each market. We also lease or own7695 smaller van-like trucks, which are used to deliver merchandise locally or within a given geographic region.COMPETITIONCompetition
We believe that the unit demand for
men'smen’s tailored clothing has generally declined over the past decade. Our primary competitors include specialtymen'smen’s clothing stores, traditional department stores, off-price retailers, manufacturer-owned and independently owned outlet stores and three-day stores. Over the past several years market conditions have resulted in consolidation of the industry. We believe that the principal competitive factors in the menswear market are merchandise assortment, quality, price, garment fit, merchandise presentation, store location and customer service.We believe that strong vendor relationships, our direct sourcing program and our buying volumes and patterns are the principal factors enabling us to obtain quality merchandise at attractive prices. We believe that our vendors rely on our predictable payment record and history of honoring promises, including our promise not to advertise names of labeled and unlabeled designer merchandise when requested. Certain of our competitors (principally department stores) may be larger and may have substantially greater financial, marketing and other resources than we have and therefore may have certain competitive advantages.
SEASONALITYSeasonality
Like most retailers, our business is subject to seasonal fluctuations. In most years, over 30% of our net sales and over
45%40% of our net earnings have been generated during the fourth quarter of each year. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full year (see Note1012 of Notes to Consolidated Financial Statements).TRADEMARKS AND SERVICEMARKS5
Trademarks and Servicemarks
We are the owner in the United States of the trademark and servicemark
"The Men's Wearhouse(R)"“The Men’s Wearhouse®” and of federal registrations therefor expiring in 2009, 20102009and 2012, respectively, subject to renewal. We have also been granted registrations for that trademark and servicemark in 43 of the4344 states (including Texas and California) in which we currently do business (as well as the District of Columbia) and have used those marks. We are also the owner of"MW Men's“MW Men’s Wearhouse (and design)(R)"®” and federal registrations therefor expiring in 2010 and 2011, respectively, subject to renewal. Our rights in the"The Men's Wearhouse(R)"“The Men’s Wearhouse®” and"MW Men's“MW Men’s Wearhouse (and design)(R)"®” marks are a significant part of our business, as the marks have become well known through our television and radio advertising campaigns. Accordingly, we intend to maintain our marks and the related registrations.We are also the owner in the United States of the servicemarks
"The“The SuitWarehouse(R)"Warehouse®” and"The“The Suit Warehouse (and logo),"” which are tradenames used by certain of the stores in Michiganand Ohiooperated by K&G, and"K&G(R)"“K&G®”, which is a tradename used by K&G stores. K&G stores also operate under the tradenames"K“K&GMen's Superstore(R)Men’s Superstore®," "K” “K&GMen's Center(R)," "KMen’s Center,” “K&GMenSmart(R)"MenSmart” and"K“K&GLadies(R)Ladies®."” We own the registrations for"K&G(R)“K&G®," "K” “K&G (stylized)(R)®," "K” “K&G For Men. For Women. ForLess(R)Less®," "K” “K&GMen's Superstore(R)For Men. For Less®," "K” “K&GMen'sMen’s Superstore®,” “K&G Men’s Superstore (and design)(R) ," "K® ,” “K&GLadies(R)Ladies®,"” and"K“K&GSuperstore(R)Superstore®."” The application for the servicemark"K“K&G LadiesSuperstore"Superstore” ispending.pending. In addition, we own or license other5trademarks/servicemarks used in the business, principally in connection with the labeling of products purchased through the direct sourcing program. We are also the owner in the United States of the service mark “MWCLEANERS” as well as certain logos incorporating “MWCLEANERS” or the letters “MW” to identify dry cleaning services. The applications are currently pending with the United States Patent and Trademark Office.
We own Canadian trademark registrations for the marks
"Moores“Moores The SuitPeople(R)People®," "Moores” “Moores Vetements PourHommes(R)Hommes®," "Moores” “Moores Vetements Pour Hommes (and design)(R)®," "Moores” “Moores Clothing ForMen(R)"Men®” and"Moores“Moores Clothing For Men (and design)(R)®."” Moores stores operate under the tradenames"Moores“Moores Clothing ForMen"Men” and"Moores“Moores Vetements Pour Hommes." EMPLOYEES”We are also the owner in Canada of the service mark “MWCLEANERS” as well as certain logos incorporating “MWCLEANERS” or the letters “MW” to identify dry cleaning services. The applications are currently pending with the Canadian Trademarks Office.
Employees
At January
31, 2004,29, 2005, we had approximately12,30013,200 employees, of whom approximately9,4009,900 were full-time and approximately2,9003,300 were part-time employees. Seasonality affects the number of part-time employees as well as the number of hours worked by full-time and part-time personnel. Approximately984899 of our employees at Golden Brand belong to the Union of Needletrades, Industrial and Textile Employees. Golden Brand is part of a collective bargaining unit, of which it is the largest company. The current union contract expires in November 2005.6
ITEM 2. PROPERTIES
As of January
31, 2004,29, 2005, we operated579593 retail apparel stores in 44 states and the District of Columbia and 114 retail apparel stores in the 10 Canadian provinces. The following table sets forth the location, by state or province, of these stores:
Men's Wearhouse K&G Moores --------- --- ------UNITED STATES California............................................. 86 Texas.................................................. 45 12 Florida................................................ 37 2 New York............................................... 24 3 Illinois............................................... 22 5 Pennsylvania........................................... 21 3 Michigan............................................... 20 6 Ohio................................................... 18 6 Georgia................................................ 17 6 Virginia............................................... 17 2 Massachusetts.......................................... 14 2 New Jersey............................................. 13 7 Maryland............................................... 13 4 Washington............................................. 13 2 Colorado............................................... 12 2 North Carolina......................................... 12 1 Arizona................................................ 11 Missouri............................................... 10 1 Minnesota.............................................. 9 2 Tennessee.............................................. 9 1 Connecticut............................................ 8 2 Oregon................................................. 8 Indiana................................................ 7 1 Wisconsin.............................................. 7 Alabama................................................ 5 1 Utah................................................... 5 Nevada................................................. 5 Louisiana.............................................. 4 1 Kentucky............................................... 4 Kansas................................................. 3 1 Nebraska .............................................. 3 New Hampshire.......................................... 3 Oklahoma............................................... 3 South Carolina......................................... 3 Arkansas............................................... 2 Delaware............................................... 2 Iowa................................................... 2 New Mexico............................................. 2 Idaho.................................................. 1 Maine.................................................. 1 Mississippi............................................ 1 Rhode Island........................................... 1 South Dakota........................................... 1 West Virginia.......................................... 1 District of Columbia................................... 1 CANADA Ontario................................................ 50 Quebec................................................. 23 British Columbia....................................... 14 Alberta................................................ 12 Manitoba............................................... 5 New Brunswick.......................................... 3 Nova Scotia............................................ 3 Saskatchewan........................................... 2 Newfoundland........................................... 1 Prince Edward Island................................... 1 --- -- --- Total.............................................. 506 73 114 === == ===
Men’s United States Wearhouse K&G Moores California 85 Texas 42 12 Florida 37 2 New York 27 3 Pennsylvania 23 3 Illinois 22 5 Michigan 20 6 Ohio 19 5 Georgia 17 6 Virginia 17 2 Washington 15 2 Massachusetts 14 3 Maryland 14 4 Colorado 12 2 North Carolina 12 2 New Jersey 12 7 Arizona 11 Missouri 11 1 Minnesota 9 2 Tennessee 9 1 Wisconsin 9 1 Connecticut 8 2 Oregon 8 Indiana 7 1 Louisiana 6 1 Alabama 5 1 Utah 5 Nevada 5 New Mexico 4 Kentucky 4 1 Kansas 3 1 Nebraska 3 New Hampshire 3 Oklahoma 3 South Carolina 3 Arkansas 2 Delaware 2 Iowa 2 Idaho 1 Maine 1 Mississippi 1 Rhode Island 1 South Dakota 1 West Virginia 1 District of Columbia 1 Ontario 50 Quebec 23 British Columbia 14 Alberta 12 Manitoba 5 New Brunswick 3 Nova Scotia 3 Saskatchewan 2 Newfoundland 1 Prince Edward Island 1 Total 517 76 114 7
Men'sMen’s Wearhouse and Moores stores vary in size from approximately 2,950 to 15,100 total square feet (average square footage at January
31, 200429, 2005 was5,5855,595 square feet with67%66% of stores having between 4,500 and 6,500 square feet).Men'sMen’s Wearhouse and Moores stores are primarily located in middle and upper-middle income regional strip and specialty retail shopping centers. We believe our customers generally prefer to limit the amount of time they spend shopping for menswear and seek easily accessible store sites.Men'sMen’s Wearhouse and Moores stores are designed to further our strategy of facilitating sales while making the shopping experience pleasurable. We attempt to create a specialty store atmosphere through effective merchandise presentation and sizing, attractive in-store signs and efficient checkout procedures. Most of these stores have similar floor plans and merchandise presentation to facilitate the shopping experience and sales process. Designer, brand name and private label garments are intermixed, and emphasis is placed on the fit of the garment rather than on a particular label or manufacturer. Each store is staffed with clothing consultants and sales associates and has a tailoring facility with at least one tailor.
K&G stores vary in size from approximately 5,400 to 50,000 total square feet (average square footage at January
31, 200429, 2005 was22,91723,291 square feet with44%42% of stores having between 15,000 and 25,000 square feet). K&G stores are"destination"“destination” stores located primarily in low-cost warehouses and second generation strip shopping centers that are easily accessible from major highways and thoroughfares. K&G has created a 25,000 square foot prototypemen'smen’s andladies'ladies’ superstore with fitting rooms and convenient check-out, customer service and tailoring areas. K&G stores are organized to convey the impression of a dominant assortment of first-quality merchandise and to project a no-frills, value-oriented warehouse atmosphere. Each element of store layout and merchandise presentation is designed to reinforce K&G's&G’s strategy of providing a large selection and assortment in each category. We seek to make K&G stores"customer friendly"“customer friendly” by utilizing store signage and grouping merchandise by categories and sizes, with brand name and private label merchandise intermixed.We also seek to instillTo provide our customers with a greater sense ofurgency for the customer toconsistency and purchaseby openingopportunities, in September 2004 we extended our hours of operation at our K&G stores from four to seven days a week. Prior to September 1, 2004, our K&G stores were open for business on Thursdays, Fridays, Saturdays and Sundays only, except for a limited number of Monday holidays and an expanded schedule for certain holiday periods when the storesarewere open every day. Each store is typically staffed with a manager, assistant manager and other employees who serve as customer service and sales personnel and cashiers. Each store also has a tailoring facility with at least one tailor.We lease our stores on terms generally from five to ten years with renewal options at higher fixed rates in most cases. Leases typically provide for percentage rent over sales break points. Additionally, most leases provide for a base rent as well as
"triple“triple netcharges"charges”, including but not limited to common areaandmaintenance expenses, property taxes, utilities, center promotions and insurance. In certain markets, we lease between 1,000 and3,0005,000 additional square feetin eitheras aMen'spart of a Men’s Wearhouse store or in a separate hub warehouse unit to be utilized as a redistribution facility in that geographic area.During 1999, we purchased a 46-acre site in Houston on which we have developed our principal warehouse and distribution facilities. The first phase of development, an approximately 385,000 square foot facility to support our tuxedo rental program and our flat-packed merchandise, became operational during 2001. In early 2003, we implemented an in-house tuxedo dry cleaning plant as part of the facility. In late 2003, we completed phase two of our development, an addition of approximately 242,000 square feet primarily to support the tuxedo rental program. In late 2004, we
plan to developcompleted phase three of our development, an additional 300,000 square feetin orderto accommodate the centralization of our warehouse and distribution program for K&G. In early 2005, we developed an additional 150,000 square feet in order to further accommodate our current and future operations as well as our E-commerce activities. We also own a 240,000 square foot facility situated on approximately seven acres of land in Houston, Texas which serves as an office, warehouse and distribution facility. Approximately 65,000 square feet of this facility is used as office space for our financial, information technology and construction departments with the remaining 175,000 square feet serving as a warehouse and distribution center. We also own a 150,000 square foot facility, situated on an adjacent six acres, comprised of approximately 9,000 square feet of office space and 141,000 square feet serving as a warehouse and distribution center.Our executive offices in Fremont, California are housed in a 35,500 square foot facility that we own. This facility serves as an office and training facility. We also lease
18,78821,052 square feet of additional office space in two other locations and 27,000 square feet of warehouse space in Richmond, California.K&G leases a 100,000 square foot facility in Atlanta, Georgia which serves as an office, distribution and store facility. Approximately 35,000 square feet of this facility is used as office space for financial, information
8
technology and merchandising personnel, 23,000 square feet is used as a distribution center for store fixtures and supplies and the remaining 42,000 square feet is used as a store.
8Moores leases a 37,700 square foot facility in Toronto, Ontario, comprised of approximately 17,900 square feet of office space and 19,800 square feet utilized for warehousing and distribution. Moores also leases a 48,930 square foot facility in Toronto that is utilized as its tuxedo distribution center. In January 2005, Moores purchased a building of approximately 131,000 square feet which will be utilized as its new tuxedo distribution center. The lease for the 48,930 square foot facility expires in early 2007. Negotiations for early termination of this lease or for the subletting of these premises are presently in progress. The new tuxedo distribution center is expected to be in operation by the end of the first quarter of fiscal 2005. In addition, Moores leases a 94,700 square foot warehouse and distribution center facility in Montreal, Quebec, and a 230,000 square foot facility in Montreal, Quebec,
comprisingcomprised of approximately 13,000 square feet of office space, 37,600 square feet of warehouse space and 179,400 square feet of manufacturing space.The lease for the 94,700 square foot warehouse and distribution center in Montreal will expire in early 2005. Moores
doeswill notintend torenewthatthis lease. Instead, in 2004, Mooreshas made an offer to purchasepurchased vacant land from the City of Montreal andintends to construct an approximately 80,000constructed a 79,000 square foot facility on thisland. Itland to function as its new warehouse and distribution center in Montreal, Quebec. This facility isanticipated that construction will begincomprised of 75,400 square feet of warehouse and distribution center operations and 3,600 square feet of office space. The newly constructed facility began operations inlate spring 2004 and that the premises will be occupied by the end of the year. The total cost of the land, building and leasehold improvements is expected to be approximately US$5 million.January 2005.ITEM 3. LEGAL PROCEEDINGS
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“Orange CountySuit"). 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"Suit”). The Orange County Suit was brought as a purported classaction. The Los Angeles County Suit was brought as a multi-party action. The Suits allegeaction and alleges several causes of action, each based on the factual allegation that in the State of California the Companyand K&Gmisclassified its managers and assistant managers as exempt from the application of certain California labor statutes. Because of this alleged misclassification, theSuits allegeOrange County Suit alleges that the Companyand K&Gfailed to pay overtime compensation and provide the required rest periods to such employees. TheSuits seek,Orange County Suit seeks, 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.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. As a result of recent mediations, we recognized a charge in the fourth quarter of 2003 for $3.7 million ($2.3 million, net of tax) which we believe to be a reasonable estimate of the incremental cost we expect to incur in connection with the proposed resolution of the Suits and the Tailor's Suit.We believe that theSuits and the Tailor'sOrange County Suit will be resolved in2004;2005; however, no assurance can be given that the anticipated resolution will be realized. We do not believe the ultimate resolution of theSuits or the Tailor'sOrange County Suit will have a material adverse effect on our financial position, results of operations or cash flows.On April 1, 2004, a lawsuit was filed against the Company in the Superior Court of California for the County of Los Angeles, Case No. BC313038 (the
"PII Suit"“PII Suit”). The PII Suit, which was brought as a purported class action, alleges two causes of action, each based on the factual allegation that the Company requests or requires, in conjunction with acustomer'scustomer’s use of his or her credit card, the customer to provide personal identification information which is recorded upon the credit card transaction form. The PII Suit seeks: (i) civil penalties pursuant to the California Civil Code; (ii) an order enjoining the Company from requesting or requiring that a customer provide personal identification information which is then recorded on the transaction form; (iii) permanent and preliminary injunctions against the Company requesting or requiring that a customer provide personal identification information which is then recorded on the transaction form; (iv) restitution of all funds allegedly acquired by means of any act or practice declared by the Court to be unlawful or fraudulent or to constitute a violation of the California Business and Professions Code; (v)attorney'sattorney’s fees; and (vi) costs of suit. ThecourtCourt has not yet decided whether the action may proceed as a class action. TheCompany intends to vigorously defendCourt has determined that thePII Suit.claim for restitution may not proceed. We have reached a tentative settlement; however, no assurance can be given that the Court will approve the settlement or that the anticipated resolution will be realized. We do not believe the ultimate resolution of the PII Suit will have a material adverse effect on our financial position, results of operations or cash flows.9In 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,position, results of operations or cash flows.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended January
31, 2004. 1029, 2005. 9
PART II
ITEM 5. MARKET FOR THE
COMPANY'SCOMPANY’S COMMON EQUITY AND RELATED STOCKHOLDERMATTERSOur common stock is traded on the New York Stock Exchange under the symbol
"MW."“MW.” The following table sets forth, on a per share basis for the periods indicated, the high and low sale prices per share for our common stock as reported by the New York Stock Exchange:
HIGH LOW ------------ ------------FISCAL YEAR 2002 First quarter ended May 4, 2002....................... $ 26.50 $ 20.29 Second quarter ended August 3, 2002................... 28.72 18.35 Third quarter ended November 2, 2002.................. 20.61 9.61 Fourth quarter ended February 1, 2003................. 20.00 13.25 FISCAL YEAR 2003 First quarter ended May 3, 2003....................... $ 17.05 $ 11.76 Second quarter ended August 2, 2003................... 26.00 15.80 Third quarter ended November 1, 2003.................. 30.90 23.95 Fourth quarter ended January 31, 2004................. 31.25 21.41
High Low First quarter ended May 3, 2003 $ 17.05 $ 11.76 Second quarter ended August 2, 2003 26.00 15.80 Third quarter ended November 1, 2003 30.90 23.95 Fourth quarter ended January 31, 2004 31.25 21.41 First quarter ended May 1, 2004 $ 28.14 $ 22.83 Second quarter ended July 31, 2004 27.25 22.90 Third quarter ended October 30, 2004 31.94 24.88 Fourth quarter ended January 29, 2005 34.51 30.15 On April
9, 2004,25, 2005, there were approximately 1,580 holders of record and approximately5,90018,300 beneficial holders of our common stock.We have not paid cash dividends on our common stock and we currently intend to retain all of our earnings for the future operation and expansion of our business. Our credit agreement prohibits the payment of cash dividends on our common stock (see Note 3 of Notes to Consolidated Financial Statements).
On October 21, 2003, we issued $130.0 million of 3.125% Convertible Senior Notes due 2023 ("Notes") in a private placement to Bear, Stearns & Co. Inc., Wachovia Capital Markets, LLC, J.P. Morgan Securities Inc. and Fleet Securities, Inc., as initial purchasers. The Notes were offered only to "qualified institutional buyers", in accordance with Rule 144A under the Securities Act of 1933. We received aggregate proceeds of $126.6 million, excluding the initial purchasers' discount. A portion of the net proceeds from the Notes was used to repay the outstanding indebtedness under our Canadian term credit agreement and to repurchase shares of our common stock under the program authorized by the Board in September 2003; the balance is reserved for general corporate purposes, which may include additional purchases of our common stock under our share repurchase program. Interest on the Notes is payable semi-annually on April 15 and October 15 of each year, beginning on April 15, 2004. The Notes will mature on October 15, 2023. However, holders may require us to purchase all or part of the Notes, for cash, at a purchase price of 100% of the principal amount per Note plus accrued and unpaid interest on October 15, 2008, October 15, 2013 and October 15, 2018 or upon a designated event. Beginning on October 15, 2008, we will pay additional contingent interest on the Notes if the average trading price of the Notes is above a specified level during a specified period. In addition, we may redeem all or a portion of the Notes on or after October 20, 2008, at 100% of the principal amount of the Notes plus any accrued and unpaid interest, contingent interest and additional amounts, if any. We also have the right to redeem the Notes between October 20, 2006 and October 19, 2008 if the price of our common stock reaches certain levels. During certain periods, the Notes are convertible by holders into shares of our common stock initially at a conversion rate of 23.3187 shares of common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of $42.88 per share of common stock (subject to adjustment in certain events), under the following circumstances: (1) if the closing sale price of our common stock issuable upon conversion exceeds 120% of the conversion price under specified conditions; (2) if we call the Notes for redemption; or (3) upon the occurrence of specified corporate transactions. Upon conversion of the Notes, in lieu of delivering common stock we may, at our election, deliver cash or a combination of cash and common stock. The Notes are general senior unsecured obligations, ranking on a parity in right of payment with all our existing and future unsecured senior indebtedness and our other general unsecured obligations, and senior in right of payment with all our future subordinated indebtedness. The Notes are effectively subordinated to all of our senior secured indebtedness, and all indebtedness and liabilities of our subsidiaries. 1110
ITEM 6. SELECTED FINANCIAL DATA
The following selected statement of earnings,
andbalance sheet and cash flow information for the fiscal years indicated has been derived from our audited consolidated financial statements. The Selected Financial Data should be read in conjunction with"Management's“Management’s Discussion and Analysis of Financial Condition and Results ofOperations"Operations” and the Consolidated Financial Statements and notes thereto. References herein to years are to theCompany'sCompany’s 52-week or 53-week fiscal year, which ends on the Saturday nearest January 31 in the following calendar year. For example, references to"2003"“2004” mean the fiscal year ended January31, 2004.29, 2005. All fiscal years for which financial information is included herein had 52 weeks, except 2000 which had 53 weeks.Financial and operating data for all periods presented reflect the retroactive effect of the February 1999 combination with Moores Retail Group Inc. ("Moores") and the June 1999 combination with K&G Men's Center, Inc. ("K&G"), both accounted for as a pooling of interests (see notes below).
2000 (5) 2001 (5) 2002 (5) 2003 (5) 2004 (as restated- (as restated- (as restated- (as restated- note 13) note 13) note 13) note 13) (Dollars and shares in thousands, except per share and per square foot data) Net sales $ 1,333,501 $ 1,273,154 $ 1,295,049 $ 1,392,680 $ 1,546,679 Gross margin 514,404 450,049 454,239 513,446 603,004 Operating income 140,896 72,779 69,300 81,783 118,088 Net earnings 84,505 42,628 42,355 49,734 71,356 Net earnings per share of common stock: Basic $ 2.02 $ 1.04 $ 1.04 $ 1.28 $ 1.98 Diluted $ 1.99 $ 1.03 $ 1.04 $ 1.27 $ 1.94 Weighted average shares outstanding 41,769 40,997 40,590 38,789 36,029 Weighted average shares outstanding plus dilutive potential common shares 42,401 41,446 40,877 39,295 36,813 Percentage increase/(decrease) in comparable US store sales (1) 3.3 % (10.2 )% (3.1 )% 6.1 % 7.3 % Percentage increase/(decrease) in comparable Canadian store sales (1) 8.3 % 4.2 % (2.1 )% (5.1 )% 7.1 % Average square footage — all stores (2) 6,520 7,046 7,174 7,411 7,497 Average sales per square foot of selling space (3) $ 406 $ 336 $ 319 $ 338 $ 368 Open at beginning of the period 614 651 680 689 693 Opened 39 32 16 13 20 Acquired 1 ¾ ¾ ¾ ¾ Closed (3 ) (3 ) (7 ) (9 ) (6 ) Open at end of the period 651 680 689 693 707 Capital expenditures $ 81,312 $ 67,169 $ 47,380 $ 49,663 $ 85,392 Depreciation and amortization 35,245 43,877 46,885 50,993 53,319 Purchase of treasury stock 7,871 30,409 28,058 109,186 11,186 11
February 3, February 2, February 1, January 31, January 29, 2001 (5) 2002 (5) 2003 (5) 2004 (5) 2005 (as restated- (as restated- (as restated- (as restated- note 13) note 13) note 13) note 13) Cash and cash equivalents $ 84,426 $ 38,644 $ 84,924 $ 132,146 $ 165,008 Working capital 317,923 303,539 326,060 357,045 388,229 Total assets 722,810 728,976 780,104 878,127 993,322 Long-term debt 42,645 37,740 38,709 131,000 130,000 Shareholders’ equity 490,521 504,809 526,585 487,792 568,848
1999 2000 2001 2002 2003 ----------- ----------- ----------- ----------- ----------- (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AND PER SQUARE FOOT DATA)STATEMENT OF EARNINGS DATA: Net sales .................................. $ 1,186,748 $ 1,333,501 $ 1,273,154 $ 1,295,049 $ 1,392,680 Gross margin ............................... 438,966 514,666 451,111 454,348 513,943 Operating income(1) ....................... 100,931 141,158 73,841 69,392 82,248 Net earnings (1) ........................... 53,045 84,661 43,276 42,412 50,026 Net earnings per share of common stock (1): Basic .................................... $ 1.27 $ 2.03 $ 1.06 $ 1.04 $ 1.29 Diluted .................................. $ 1.25 $ 2.00 $ 1.04 $ 1.04 $ 1.27 Weighted average shares outstanding .............................. 41,848 41,769 40,997 40,590 38,789 Weighted average shares outstanding plus dilutive potential common shares .... 42,452 42,401 41,446 40,877 39,295 OPERATING INFORMATION: Percentage increase/(decrease) in comparable USComparable store sales (2) ............ 7.7% 3.3% (10.2)% (3.1)% 6.1% Percentage increase/(decrease) in comparable Canadiandata is calculated by excluding the net sales of a storesalesfor any month of one period if the store was not open throughout the same month of the prior period. Fiscal year 2000 is calculated on a 52-week basis.(2) ................... 0.3% 8.3% 4.2% (2.1)% (5.1)%Average square footage--footage — all stores is calculated by dividing the total square footage for all stores open at the end of the period by the number of stores open at the end of such period.(3) .... 6,193 6,520 7,046 7,174 7,411Average sales per square foot of selling space is calculated by dividing total selling square footage for all stores open the entire year into total sales for those stores. (4) ................................ $ 400 $ 406 $ 336 $ 319 $ 338 NumberRetail apparel stores include stores operating under our Men’s Wearhouse, K&G and Moores brands. (5) Fiscal years 2002 and 2003 have been restated to reflect certain lease accounting adjustments as discussed in Note 13 of retail apparel stores: Open at beginning of the period ......... 579 614 651 680 689 Opened .................................. 54 39 32 16 13 Acquired ................................ - 1 - - - Closed .................................. (19) (3) (3) (7) (9) ----------- ----------- ----------- ----------- ----------- Open at end of the period ............... 614 651 680 689 693 CASH FLOW INFORMATION: Capital expenditures ....................... $ 47,506 $ 79,411 $ 64,777 $ 45,422 $ 48,700 DepreciationNotes to Consolidated Financial Statements. Conforming adjustments have been made to fiscal years 2000 andamortization .............. 30,082 34,689 41,949 44,284 48,130 Purchase of treasury stock ................. 1,273 7,871 30,409 28,058 109,1862001.12
JANUARY 29, FEBRUARY 3, FEBRUARY 2, FEBRUARY 1, JANUARY 31, 2000 2001 2002 2003 2004 ----------- ----------- ----------- ----------- -----------BALANCE SHEET INFORMATION: Cash.......................................... $ 77,798 $ 84,426 $ 38,644 $ 84,924 $ 132,146 Working capital............................... 280,251 316,213 301,935 325,272 356,823 Total assets.................................. 611,195 713,317 717,869 769,313 869,198 Long-term debt ............................... 46,697 42,645 37,740 38,709 131,000 Shareholders' equity.......................... 408,973 494,987 509,883 531,761 493,460(1) On February 10, 1999, we combined with Moores, a privately owned Canadian corporation, in exchange for securities ("Exchangeable Shares") exchangeable for 2.5 million shares of our common stock. The Exchangeable Shares were issued to the shareholders and option Holders of Moores in exchange for all of the outstanding shares of capital stock and options of Moores because of Canadian tax law considerations. As of February 3, 2001, all Exchangeable Shares, which had substantially identical economic and legal rights as shares of our common stock, had been converted on a one-on-one basis to our common stock. As of January 29, 2000, there were 1.0 million Exchangeable Shares that had not yet been converted but were reflected as common stock outstanding for financial reporting purposes by the Company. The combination with Moores has been accounted for as a pooling of interests. On June 1, 1999, we combined with K&G, a superstore retailer of men's apparel and accessories operating 34 stores in 16 states. We issued approximately 4.4 million shares of our common stock to K&G shareholders based on an exchange ratio of 0.43 of a share of our common stock for each share of K&G common stock outstanding. In addition, we converted the outstanding options to purchase K&G common stock, whether vested or unvested, into options to purchase 228,000 shares of our common stock based on the exchange ratio of 0.43. The combination has been accounted for as a pooling of interests. In 1999, in conjunction with the Moores and K&G combinations as discussed above, we recorded transaction costs of $7.7 million, duplicative store closing costs of $6.1 million and litigation costs of $0.9 million. These charges in total reduced operating income by $19.0 million and net earnings by $14.1 million; basic and diluted earnings per share of common stock were reduced by $0.34 and $0.33, respectively. In addition, we recorded a charge of $4.3 million related to the write-off of deferred financing costs and prepayment penalties for the refinancing of approximately US$57 million of Moores indebtedness. (2) Comparable store sales data is calculated by excluding the net sales of a store for any month of one period if the store was not open throughout the same month of the prior period. Fiscal year 2000 is calculated on a 52-week basis. (3) Average square footage -- all stores is calculated by dividing the total square footage for all stores open at the end of the period by the number of stores open at the end of such period. (4) Average sales per square foot of selling space is calculated by dividing total selling square footage for all stores open the entire year into total sales for those stores. 13ITEM 7.
MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSGENERALRestatement of Financial Statements
Management’s Discussion and Analysis of Financial Condition and Results of Operations as presented herein gives effect to the restatement of our consolidated financial statements for fiscal 2002 and 2003 for certain lease accounting adjustments. See Note 13 of Notes to Consolidated Financial Statements for a description of the adjustments.
General
The
Men'sMen’s Wearhouse opened its first store in Houston, Texas in August 1973, and we are now one of the largest specialty retailers ofmen'smen’s suits in the United States and Canada. At January31, 2004,29, 2005, we operated693707 retail apparel stores with579593 stores in the United States and 114 stores in Canada. Our U.S. stores are primarily operated under the brand names ofMen'sMen’s Wearhouse(506(517 stores) and K&G(73(76 stores) in 44 states and the District of Columbia. Our Canadian stores are operated under the brand name of Moores Clothing for Men in ten provinces. For2003,2004, we had revenues of $1.547 billion and net earnings of $71.4 million, compared to revenues of $1.393 billion and net earnings of$50.0$49.7 millioncompared toin 2003 and revenues of $1.295 billion and net earnings of $42.4 million in2002 and revenues of $1.273 billion and net earnings of $43.3 million in 2001.2002. The more significant factors impacting these results are addressed in the"Results“Results ofOperations"Operations” discussion below.Under the
Men'sMen’s Wearhouse and Moores brands, which contributed approximately 80% of our revenues, we target middle and upper-middle income men by offering quality merchandise at everyday low prices. Because we concentrate onmen's "wear-to-work"men’s “wear-to-work” business attire which is characterized by infrequent and more predictable fashion changes, we believe we are not as exposed to trends typical of more fashion-forward apparel retailers, where significant markdowns and promotional pricing are more common. In addition, because this inventory mix includes"business casual"“business casual” merchandise, we are able to meet demand for such products resulting from the trend over the past decade toward more relaxed dress codes in the workplace. We also strive to provide a superior level of customer service by training our sales personnel as clothing consultants and offering on-site tailoring services in each of our stores. We believe that the quality, value, selection and service we provide to ourMen'sMen’s Wearhouse and Moores customers have been significant factors in enabling us to consistently gainvaluablemarket share within both the U.S. and Canadian markets formen'smen’s tailored apparel. In addition, we have expanded our customer base and leveraged our existing infrastructure by completing the rollout of our tuxedo rental program to nearly all of ourMen'sMen’s Wearhouse stores in early 2002 andintroducing the program in 48to all of our Moores storesin late 2003.during the first quarter of fiscal 2004. As a percentage of total revenues, tuxedo rentals have grown from0.8% in 2001 to2.5% in 2002andto 3.7% in2003.2003 and 5.0% in 2004. These revenues are expected to continue to increase in20042005 as the programmatures and is extendedcontinues tothe remaining Moores stores.mature.Under the K&G brand, we target the more price sensitive customer with a value-oriented superstore approach. K
&G's&G’s merchandising strategy emphasizes broad assortments ofmen'smen’s apparel across all major categories, including tailored clothing, casual sportswear, dress furnishings, footwear and accessories. In addition,3543 of the7376 K&G stores operating at January31, 200429, 2005 offerladies'ladies’ career apparel that is also targeted to the more price sensitive customer. Although K&G employees assist customers with merchandise selection, including correct sizing, the stores are designed to allow customers to select and purchase apparel by themselves. Each store also provides on-site tailoring services.Like most retailers, our business is subject to seasonal fluctuations. In most years, more than 30% of our net sales and more than
45%40% of our net earnings have been generated during the fourth quarter of each year. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full year.We opened
32 stores in 2001,16 stores in 2002,and13 stores in2003.2003 and 20 stores in 2004 under our Men’s Wearhouse, K&G and Moores brands. Expansion is generally continued within a market as long as management believes it will provide profitable incremental sales volume.Historically, new stores have contributed significantly to increases in net sales and have also contributed to increased net earnings.In2004,2005, we plan to open approximatelyeleven15 newMen'sMen’s Wearhouse stores,and eightsix new K&G stores and two new Moores stores and to expand and/or relocate approximatelytwelve24 existingMen'sMen’s Wearhouse stores,and onesix existing K&Gstore.stores and eight existing Moores stores. The average cost (excluding telecommunications and point-of-sale equipment and inventory) of opening a new store is expected to be approximately$0.3$0.4 million in2004.2005. Although we believe that our ability to increase the number ofMen'sMen’s Wearhouse stores in the U.S. above 550 will be limited, we believe that additional growth opportunities exist through improving and diversifying the merchandise mix, relocating stores, expanding our K&G brand and adding complementary products and services.13
We have closed
nineteen22 stores in the three years ended January31, 2004.29, 2005. Generally, in determining whether to close a store, we consider thestore'sstore’s historical and projected performance and the continued desirability of thestore'sstore’s location. In determining store contribution, we consider net sales, cost of sales and other direct store costs, but exclude buying costs, corporate overhead, depreciation and amortization, financing costs and advertising. Store14performance is continually monitored and, occasionally, as regions and shopping areas change, we may determine that it is in our best interest to close or relocate a store. In 2001, three stores were closed due to substandard performance or lease expiration.In 2002, five stores were closed due to substandard performance or lease expiration and two stores were closed when their operations were combined with other existing area stores. In 2003, nine stores were closed due to substandard performance. In 2004, six stores were closed due to substandard performance or lease expiration. We plan to closeapproximately tentwo stores in2004. CRITICAL ACCOUNTING POLICIES2005.During 2004, we opened six new casual clothing/sportswear concept stores in order to test an expanded, more fashion-oriented merchandise concept for men and women. In March 2005, it was determined that no further investments would be made into these stores and that the six stores operating at January 29, 2005 will be wound down over the course of fiscal 2005.
Critical Accounting Policies
The preparation of our consolidated financial statements requires the appropriate application of accounting policies in accordance with generally accepted accounting principles. In many instances, this also requires management to make estimates and assumptions about future events that affect the amounts and disclosures included in our financial statements. We base our estimates on historical experience and various assumptions that we believe are reasonable under the circumstances. However, since future events and conditions and their effects cannot be determined with certainty, actual results will differ from our estimates and such differences could be material to our financial statements.
Our accounting policies are described in Note 1 of Notes to Consolidated Financial Statements. We consistently apply these policies and periodically evaluate the reasonableness of our estimates in light of actual events. Historically, we have found our critical accounting policies to be appropriate and our estimates and assumptions reasonable. We believe our critical accounting policies and our most significant estimates are those that relate to inventories and long-lived assets, including goodwill,
andour estimated liabilities for the self-insured portions of ourworkers'workers’ compensation and employee health benefitcosts.costs and our income taxes.Our inventory is carried at the lower of cost or market. Cost is determined on the average cost method for approximately
79%78% of our inventory and on the retail inventory method for the remaining21%22%. Our inventory cost also includes estimated procurement and distribution costs (warehousing, freight, hangers and merchandising costs) associated with the inventory, with the balance of such costs included in cost of sales. We make assumptions, based primarily on historical experience, as to items in our inventory that may be damaged, obsolete or salable only at marked down prices and reduce the cost of inventory to reflect the market value of these items. If actual damages, obsolescence or market demand is significantly different from our estimates, additional inventory write-downs could be required. In addition, procurement and distribution costs are allocated to inventory based on the ratio of annual product purchases to average inventory cost. If this ratio were to change significantly, it could materially affect the amount of procurement and distribution costs included in cost of sales.We make judgments about the carrying value of long-lived assets, such as property and equipment and amortizable intangibles, and the recoverability of goodwill whenever events or changes in circumstances indicate that an other-than-temporary impairment in the remaining value of the assets recorded on our balance sheet may exist. We test goodwill for impairment annually in the fourth quarter of each year or more frequently if circumstances dictate. To estimate the fair value of long-lived assets, including goodwill, we make various assumptions about the future prospects for the brand that the asset relates to and typically estimate future cash flows to be generated by these brands. Based on these assumptions and estimates, we determine whether we need to take an impairment charge to reduce the value of the asset stated on our balance sheet to reflect its estimated fair value. Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results.
WeIn 2003 and 2004 respectively, we recordednopretax impairmentcharge as a resultcharges ofour testing performed during 2002 or 2003.$2.5 million and $2.2 million, respectively, related to certain technology assets.We self-insure portions of our
workers'workers’ compensation and employee medical costs. We estimate our liability for future payments under these programs based on historical experience and various assumptions as to participating14
employees, health care costs, number of claims and other factors, including industry trends and information provided to us by our insurance broker. We also use actuarial estimates with respect to
workers'workers’ compensation. If the number of claims or the costs associated with those claims were to increase significantly over our estimates, additional charges to earnings could be necessary to cover required payments.15RESULTS OF OPERATIONSSignificant judgment is required in determining the provision for income taxes and the related taxes payable and deferred tax assets and liabilities since, in the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, our tax returns are subject to audit by various domestic and foreign tax authorities that could result in material adjustments or differing interpretations of the tax laws. Although we believe that our estimates are reasonable and are based on the best available information at the time that we prepare the provision, actual results could differ from these estimates resulting in a final tax outcome that may be materially different from that which is reflected in our consolidated financial statements.
Results of Operations
The following table sets forth the
Company'sCompany’s results of operations expressed as a percentage of net sales for the periods indicated:
FISCAL YEAR ---------------------------------- 2001 2002 2003 -------- -------- --------Net sales ................................................ 100.0% 100.0% 100.0% Cost of goods sold, including buying and occupancy costs.. 64.6 64.9 63.1 -------- -------- -------- Gross margin ............................................. 35.4 35.1 36.9 Selling, general and administrative expenses ............. 29.6 29.7 31.0 -------- -------- -------- Operating income ......................................... 5.8 5.4 5.9 Interest expense, net .................................... 0.2 0.1 0.2 -------- -------- -------- Earnings before income taxes ............................. 5.6 5.3 5.7 Provision for income taxes ............................... 2.2 2.0 2.1 -------- -------- -------- Net earnings ............................................. 3.4% 3.3% 3.6% ======== ======== ========
Fiscal Year 2002 2003 2004 Net sales 100.0 % 100.0 % 100.0 % Cost of goods sold, including buying, distribution and occupancy costs 64.9 63.1 61.0 Gross margin 35.1 36.9 39.0 Selling, general and administrative expenses 29.7 31.0 31.4 Operating income 5.4 5.9 7.6 Interest income (0.1 ) (0.1 ) (0.1 ) Interest expense 0.2 0.3 0.4 Earnings before income taxes 5.3 5.7 7.3 Provision for income taxes 2.0 2.1 2.7 Net earnings 3.3 % 3.6 % 4.6 % 2004 Compared with 2003
COMPARED WITH 2002The following table presents a breakdown of
20022003 and20032004 net sales of the Companybyfrom stores open in each of these periods (in millions):
NET SALES -------------------------------------- INCREASE/ STORES 2002 2003 (DECREASE) ------ ---------- ---------- ----------13 stores opened in 2003 ..... $ -- $ 12.0 $ 12.0 16 stores opened in 2002 ..... 24.6 36.1 11.5 Stores opened before 2002 .... 1,270.4 1,344.6 74.2 ---------- ---------- ---------- Total .............. $ 1,295.0 $ 1,392.7 $ 97.7 ========== ========== ==========
Net Sales Increase/ Stores 2003 2004 (Decrease) Stores opened in 2004 $ — $ 18.3 $ 18.3 Stores opened in 2003 12.0 34.9 22.9 Stores opened before 2003 1,376.7 1,479.6 102.9 1,388.7 1,532.8 144.1 Other 4.0 13.9 9.9 Total $ 1,392.7 $ 1,546.7 $ 154.0 The
Company'sCompany’s net sales increased$97.7$154.0 million, or7.5%11.1%, to$1.393$1.547 billion for20032004 due mainly to a$78.8$117.7 million increase in clothing and alteration sales and an$18.3$26.5 million increase in tuxedo rental revenues. Our U.S. comparable store sales (which are calculated by excluding the net sales of a store for any month of one period if the store was not open throughout the same month of the prior period) increased 7.3% due mainly to increased store traffic levels at our traditional Men’s Wearhouse stores and at our K&G stores where the hours of operation were extended from four days to seven days a week beginning September 1, 2004. We also experienced a strong response from customers during the third quarter of 2004 due to the expansion of our Men’s Wearhouse customer loyalty program. At our core Men’s Wearhouse brand, a 5.5% increase in unit suit sales helped drive increases in other product categories as well as in alteration sales. In addition, our U.S. tuxedo rental business continued to grow with a 40.9% increase in tuxedo rental revenues. In Canada, comparable store sales increased 7.1% as a result of improved unit suit sales and the rollout of the tuxedo rental business to all Moores stores at the beginning of this fiscal year. Combined U.S. and Canadian tuxedo rental revenues increased from 3.7% of total revenues in 2003 to 5.0% of total revenues in 2004.15
Gross margin increased $89.6 million, or 17.4%, to $603.0 million in 2004. As a percentage of sales, gross margin increased from 36.9% in 2003 to 39.0% in 2004. This increase in gross margin percentage resulted mainly from continued growth in our tuxedo rental business, which carries a significantly higher incremental gross margin impact than our clothing sales, and from higher cumulative mark-ups that produced higher clothing product margins. The gross margin percentage was also increased as occupancy cost, which is relatively constant on a per store basis and includes store related rent, common area maintenance, utilities, repairs and maintenance, security, property taxes and depreciation, decreased modestly as a percentage of sales from 2003 to 2004. However, on an absolute dollar basis, occupancy costs increased by 6.7% from 2003 to 2004 due mainly to higher rent expense from our increased store count and renewals of existing leases at higher rates and increased depreciation.
Selling, general and administrative (“SG&A”) expenses, as a percentage of sales, were 31.4% in 2004 compared to 31.0% in 2003, with SG&A expenditures increasing by $53.3 million or 12.3% to $484.9 million. On an absolute dollar basis, advertising decreased by $2.4 million, store salaries increased by $27.1 million and other SG&A increased by $28.6 million. As a percentage of sales, advertising expense decreased from 4.5% to 3.9%, store salaries increased from 12.3% to 12.8% and other SG&A expenses increased from 14.2% to 14.7%. On an absolute dollar basis, the principal components of SG&A expenses increased primarily due to (i) increased commissions due to higher sales, (ii) increased store salaries, benefits and other costs associated with store personnel additions for tuxedo rental operations, (iii) increased travel and training expenses related to incremental training for new and existing store personnel, (iv) increased legal costs related to various matters being litigated, (v) consulting costs associated with ongoing Sarbanes Oxley Section 404 compliance efforts and (vi) recognition of a $2.2 million pretax impairment charge related to certain technology assets. SG&A expenses were reduced in 2003 by the recognition of a $4.4 million deferred pretax gain from the sale in March 2002 of certain technology assets to an unrelated company regularly engaged in the development and licensing of software to the retail industry. However, the gain recognized in 2003 was more than offset by $2.9 million in costs related to store closures, $2.5 million in costs related to the write-off of certain technology assets and $3.7 million in litigation costs related to certain California lawsuits.
Interest expense increased from $4.0 million in 2003 to $5.9 million in 2004 while interest income remained at $1.5 million. Weighted average borrowings outstanding increased from $70.0 million in the prior year to $130.9 million in 2004, and the weighted average interest rate on outstanding indebtedness decreased from 4.6% to 3.6%. The increase in the weighted average borrowings was due primarily to the issuance of $130.0 million of 3.125% Notes in a private placement on October 21, 2003. A portion of the proceeds from the Notes was used to repay outstanding indebtedness. The decrease in the weighted average interest rate was due primarily to the lower interest rate on the Notes. See further discussion of the Notes in Note 3 of Notes to Consolidated Financial Statements and “Liquidity and Capital Resources” herein.
Our effective income tax rate was 37.3% for each of the years ended January 29, 2005 and January 31, 2004. 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 2004 net earnings of $71.4 million or 4.6% of net sales, compared with 2003 net earnings of $49.7 million or 3.6% of net sales.
2003 Compared with 2002
The following table presents a breakdown of 2002 and 2003 net sales of the Company from stores open in each of these periods (in millions):
Net Sales Increase/ Stores 2002 2003 (Decrease) Stores opened in 2003 $ — $ 12.0 $ 12.0 Stores opened in 2002 24.6 36.1 11.5 Stores opened before 2002 1,266.9 1,340.6 73.7 1,291.5 1,388.7 97.2 Other 3.5 4.0 0.5 Total $ 1,295.0 $ 1,392.7 $ 97.7 The Company’s net sales increased $97.7 million, or 7.5%, to $1.393 billion for 2003 due mainly to a $78.8 million increase in clothing and alteration sales and an $18.3 million increase in tuxedo rental revenues. Our U.S. comparable store sales increased 6.1% as improvement was experienced in nearly all product categories. At our core
Men's16
Men’s Wearhouse brand, a 14.9% increase in unit suit sales helped drive increases in other product categories as well as in alteration sales. In addition, our tuxedo rental business continued to grow following its rollout to nearly all of the
Men'sMen’s Wearhouse stores in early 2002 with tuxedo rental revenues increasing from 2.5% of total net sales in 2002 to 3.7% in 2003. Store traffic also increased, not only from our tuxedo rental customers, but also from efforts started in 2002 to increase our mix of opening price point product and to increase our penetration into the traditional clothing market. In Canada, comparable store sales for 2003 decreased 5.1% from 2002 due mainly to unusually severe and extended winter weather conditions during the first quarter, a shorter summer sale period during the second quarter and softer demand overall in the Canadianmen'smen’s apparel market experienced throughout 2003. However, this decrease was more than offset by the foreign currency exchange rate translation effect from the strengthening of the Canadian dollar.Gross margin increased
$59.6$59.2 million, or13.1%13.0%, to$513.9$513.4 million in 2003. As a percentage of sales, gross margin increased from 35.1% in 2002 to 36.9% in 2003. This increase in gross margin percentage resulted mainly from continued growth in our tuxedo rental business, which carries a significantly higher incremental gross margin impact than our clothing sales, and from higher cumulative mark-ups that produced higher clothing product margins. The gross margin percentage was also increased as occupancy cost, which is relatively constant on a per store basis and includes store related rent, common area maintenance, utilities, repairs and maintenance, security, property taxes and depreciation, decreased modestly as a percentage of sales from 2002 to 2003. However, on an absolute dollar basis, occupancy costs increased by5.1%5.3% from 2002 to 2003 due mainly to higher rent expense from our increased store count and renewals of existing leases at higher rates and increased depreciation.Selling, general and administrative
("(“SG&A"&A”) expenses, as a percentage of sales, were 31.0% in 2003 compared to 29.7% in 2002, with SG&A expenditures increasing by $46.7 million or 12.1% to $431.7 million. On an absolute dollar basis, advertising increased by $2.8 million, store salaries increased by $15.3 million and other SG&A increased by $28.6 million. As a percentage of sales, advertising expense decreased from 4.6% to 4.5%, store salaries increased from 12.1% to 12.3% and other SG&A expenses increased from 13.0% to 14.2%. On an absolute dollar basis, the principal components of SG&A expenses increased primarily due to (i) the elimination of16media spending reductions imposed in 2002, (ii) increased commissions and bonuses due to higher sales, (iii) increased store and warehouse salaries, benefits and other costs associated with a 47% increase in unit tuxedo rentals, (iv) increased non-store salaries, benefits and other costs related to our expansion strategies and (v) higher insurance costs. SG&A expenses were reduced by the recognition of a $4.4 million deferred pretax gain from the sale, in March 2002, of certain technology assets to an unrelated company regularly engaged in the development and licensing of software to the retail industry (see "Other Matters"“Other Matters” herein). However, the gain recognized in 2003 was more than offset by $2.9 million in costs related to store closures, $2.5 million in costs related to the write-off of certain technology assets and $3.7 million in litigation costs related to certain California lawsuits.Interest expense, net of interest income, increased from $1.3 million in 2002 to $2.5 million in 2003. Weighted average borrowings outstanding increased $30.2 million from the prior year to $70.0 million in 2003, and the weighted average interest rate on outstanding indebtedness decreased from 4.9% to 4.6%. The increase in the weighted average borrowings was due primarily to the issuance of $130.0 million of 3.125% Notes in a private placement on October 21, 2003. A portion of the proceeds from the Notes was used to repay the balance outstanding on our Canadian credit facility. The decrease in the weighted average interest rate was due primarily to the lower interest rate on the Notes. Interest expense was offset by interest income from the investment of excess cash of $1.0 million in 2002 and $1.5 million in 2003. See further discussion of the Notes in Note 3 of Notes to Consolidated Financial Statements and
"Liquidity“Liquidity and CapitalResources"Resources” herein.Our effective income tax rate for the year ended January 31, 2004 was 37.3% compared to
37.8%37.7% for the prior year. The effective tax rate was higher than the statutory federal rate of 35% primarily due to the effect of state income taxes.These factors resulted in 2003 net earnings of
$50.0$49.7 million or 3.6% of net sales, compared with 2002 net earnings of $42.4 million or 3.3% of net sales.2002 COMPARED WITH 2001 The following table presents a breakdown of 2001 and 2002 net sales of the Company by stores open in each of these periods (in millions):
NET SALES --------------------------------------- INCREASE/ STORES 2001 2002 (DECREASE) ------ ---------- ---------- ----------16 stores opened in 2002 ........ $ -- $ 24.6 $ 24.6 32 stores opened in 2001 ........ 26.7 57.8 31.1 Stores opened before 2001 ... 1,246.5 1,212.6 (33.9) ---------- ---------- ---------- Total ............. $ 1,273.2 $ 1,295.0 $ 21.8 ========== ========== ==========The Company's net sales increased $21.8 million, or 1.7%, to $1.295 billion for 2002 due primarily to increased sales in US stores opened in 2001 and 2002, offset partially by decreased sales from stores opened prior to fiscal 2001. Comparable store sales for 2002 decreased 3.1% in the US and 2.1% in Canada from 2001. The decrease in comparable sales for the U.S. and Canadian stores was due mainly to continued weakness in the U.S. and Canadian economies. Sales of men's apparel is particularly affected since buying patterns for men are considered to be more discretionary than those in other apparel areas. Gross margin increased $3.2 million, or 0.7%, to $454.3 million in 2002. As a percentage of sales, gross margin decreased from 35.4% in 2001 to 35.1% in 2002. This decrease in gross margin percentage predominately resulted from an increase in occupancy cost (which is relatively constant on a per store basis) as a percentage of sales and higher markdowns at the Men's Wearhouse brand associated with a shift to merchandise with lower opening price points. These decreases in the gross margin percentage were offset in part by our higher margin tuxedo rental revenues increasing from 0.8% of total revenues in fiscal 2001 to 2.5% of total revenues in fiscal 2002. Occupancy cost, which includes store related rent, common area maintenance, utilities, repairs and maintenance, security, property taxes and depreciation, increased by 8.9% on an absolute dollar basis from 2001 to 2002 due mainly to higher rent expense from our increased store count and renewals of existing leases at higher rates, higher property taxes and increased depreciation. SG&A expenses, as a percentage of sales, were 29.7% in 2002 compared to 29.6% in 2001, with SG&A expenditures increasing by $7.7 million or 2.0% to $385.0 million. On an absolute dollar basis, advertising 17decreased by $1.1 million, store salaries increased by $10.4 million and other SG&A decreased by $1.6 million. As a percentage of sales, advertising expense decreased from 4.8% to 4.6%, store salaries increased from 11.4% to 12.1% and other SG&A expenses decreased from 13.4% to 13.0%. The decrease in advertising was due to planned reductions in media spending. The increase in store salaries was the result of higher sales commission rates in 2002 for promotional and other merchandise sales categories. These commission rates were put in place to help drive the shift to lower opening price points for merchandise offerings at the Men's Wearhouse brand. Other SG&A expenses decreased due to our focus on reducing corporate overhead. Interest expense, net of interest income, decreased from $2.9 million in 2001 to $1.3 million in 2002. Weighted average borrowings outstanding decreased $25.5 million from the prior year to $39.8 million in 2002, and the weighted average interest rate on outstanding indebtedness decreased from 5.4% to 4.9%. The decrease in the weighted average borrowings resulted primarily from decreased short-term borrowings under our credit facilities. The decrease in the weighted average interest rate was due primarily to decreases during 2002 in the LIBOR rate. Interest expense was offset by interest income from the investment of excess cash of $0.8 million in 2001 and $1.0 million in 2002. See "LiquidityLiquidity and Capital
Resources" discussion herein. Our effective income tax rate for the year ended February 1, 2003 was 37.8% compared to 39.0% for the prior year. The effective tax rate was higher than the statutory federal rate of 35% primarily due to the effect of state income taxes. These factors resulted in 2002 net earnings of $42.4 million or 3.3% of net sales, compared with 2001 net earnings of $43.3 million or 3.4% of net sales. LIQUIDITY AND CAPITAL RESOURCESResourcesIn January 2003, we replaced
ouran 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"“Credit Agreement”) that provides for borrowing of up to $100.0 million through February 4,2006 (with extensions for up2006. In July 2004, we amended the Credit Agreement totwo years under certain conditions).extend the maturity date to July 7, 2009. The Credit Agreement is secured by substantially all of the stock of the subsidiaries of TheMen'sMen’s Wearhouse, Inc. Advances under thenewCredit Agreement bear interest at a rate17
per annum equal to, at our option, the
agent'sagent’s prime rate or the reserve adjusted LIBOR rate plus a varying interest rate margin up to 2.25%. The Credit Agreement also provides for fees applicable to unused commitments ranging from 0.275% to 0.500%.The terms and conditions of the new Credit Agreement are substantially the same as those of the replaced facility. In addition, in January 2003, we entered into a new Canadian term credit agreement under which we borrowed Can $62.0 million (US $40.7 million) which was used to repay approximately Can $60.9 million (US $40.0 million) in outstanding indebtedness of Moores under the previous term credit agreement. On October 31, 2003, we repaid the outstanding indebtedness of Can $60.5 million (US $45.9 million).As of January31, 2004,29, 2005, there were no borrowings outstanding under the Credit Agreement.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
arewere in compliance with the covenants in the Credit Agreement as of January31, 2004.29, 2005.On October 21, 2003, we issued $130.0 million of 3.125% Notes in a private placement. A portion of the net proceeds from the Notes was used to repay
theoutstanding indebtednessunder our Canadian term credit agreementand to repurchase shares of our common stock under the program authorized by the Board in September 2003 (see below); the balance is reserved for general corporate purposes, which may include additional purchases of our common stock under our share repurchase program. Interest on the Notes is payable semi-annually on April 15 and October 15 of each year, beginning on April 15, 2004. The Notes will mature on October 15, 2023. However, holders may require us to purchase all or part of the Notes, for cash, at a purchase price of 100% of the principal amount per Note plus accrued and unpaid interest on October 15, 2008, October 15, 2013 and October 15, 2018 or upon a designated event. Beginning on October 15, 2008, we will pay additional contingent interest on the Notes if the average trading price of the Notes is above a specified level during a specified period. In addition, we may redeem all or a portion of the Notes on or after October 20, 2008, at 100% of the principal amount of the Notes plus any accrued and unpaid interest, contingent interest and additional amounts, if any. We also have the right to redeem the Notes between October 20, 2006 and October 19, 2008 if the price of our common stock reaches certain levels.18During certain periods, the Notes are convertible by holders into shares of our common stock initially at a conversion rate of 23.3187 shares of common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of $42.88 per share of common stock (subject to adjustment in certain events), under the following circumstances: (1) if the closing sale price of our common stock issuable upon conversion exceeds 120% of the conversion price under specified conditions; (2) if we call the Notes for redemption; or (3) upon the occurrence of specified corporate transactions. Upon conversion of the Notes, in lieu of delivering common stock we may, at our election, deliver cash or a combination of cash and common stock. However, on January 28, 2005, we entered into a supplemental indenture relating to the Notes and irrevocably elected to settle the principal amount at issuance of such Notes in 100% cash when they become convertible and are surrendered by the holders thereof. The Notes are general senior unsecured obligations, ranking on
aparity in right of payment with all our existing and future unsecured senior indebtedness and our other general unsecured obligations, and senior in right of payment with all our future subordinated indebtedness. The Notes are effectively subordinated to all of our senior secured indebtedness and all indebtedness and liabilities of our subsidiaries.In December 2003, we acquired the assets and operating leases for 13 retail dry cleaning and laundry facilities and issued a note payable for $1.0 million as partial consideration. The unsecured note payable,
is duewith interest at 4%, was paid in full in2008January 2005.We utilize letters of credit primarily for inventory purchases. At January 29, 2005, letters of credit totaling approximately $14.5 million were issued and
interest compounds annually at 4.0%.outstanding.Our primary sources of working capital are cash flow from operations and borrowings under the Credit Agreement. We had working capital of
$301.9$326.1 million,$325.3$357.0 million and$356.8$388.2 million at the end of2001,2002, 2003 and2003,2004, respectively. Historically, our working capital has been at its lowest level in January and February, and has increased through November as inventory buildupis financed with both vendor payables and credit facility borrowingsoccurs in preparation for the fourth quarter selling season. Working capital at the end of fiscal year20032004 is higher than fiscal year20012002 and20022003 due mainly to our increased inventory levels and cash balances.Our operating activities provided net cash of
$52.3 million in 2001, $113.0$115.0 million in 2002,and $118.8$119.7 million in 2003 and $130.0 million in 2004 mainly because cash provided by net earnings, as adjusted for non-cash charges, and increases in payables and accrued expenses more than offset cash used for other assets, inventories(2001(2003 and2003)2004) and decreases in income taxes payable(2001(2002 and2002)2004). Inventoryincreased $22.8 million in 2001, butdecreased $17.3 million in 2002. A modest increase in net sales in 2002, combined with our high inventory levels at the end of 2001 and a modification to our inventory mix at ourMen'sMen’s Wearhouse stores to increase our offering of opening price point product, resulted in lower planned inventory purchases through most of 2002. However, our buying patterns normalized in the last quarter of 2002 and resulted in an increase of$19.5$19.6 million inpayablesaccounts payable and accrued expenses for the year. In 2003 and 2004, inventories18
increased $21.6 million and $13.7 million, respectively, as sales increased and we continued our normal buying patterns. The
2003increase in accounts payable and accrued expenses of $35.5 million and $28.1 million inpayables2003 andaccrued expenses2004, respectively, was due to the increased inventories as well as higher bonuses earned as a result of increased sales and, in 2003, higher insurance costs. In 2004, the increase in accounts payable and accrued expenses was also due to the expansion of our Men’s Wearhouse customer loyalty program and increased customer purchases of gift cards. Other assets increased in each of the years primarily due to increased investment in tuxedo rentalmerchandise.product. Income taxes payable decreased in2001 and2002 mainly due toreduced earnings in 2001 anda lower effective tax rate associated with the mix of federal and state earnings in 2002; the increase in income taxes payable in 2003 resulted from increased earnings and the timing of tax payments, offset in part by a further reduction in the effective tax rate. The decrease in income taxes payable in 2004 was due primarily to increased estimated tax payments made during the year due to increased earnings and the timing of previous tax payments.Our investing activities used net cash of
$66.4$43.2 million,$41.2$55.8 million and$54.8$96.9 million in2001,2002, 2003 and2003,2004, respectively, due mainly to capital expenditures of$64.8$47.4 million,$45.4$49.7 million and$48.7$85.4 million in2001,2002, 2003 and2003,2004, respectively. Our capital expenditures relate to costs incurred for stores opened, remodeled or relocated during the year or under construction at the end of the year, distribution facility additions and infrastructure technologyinvestments.investments as detailed below. However, during 2002, cash used for capital expenditures was partially offset by $6.8 million of net proceeds received from the sale of certain technology assets to an unrelated company regularly engaged in the development and licensing of software to the retail industry. Approximately $4.4 million of this amount was recognized as a pretax operating gain by the Company in the first quarter of 2003 (see"Other Matters"“Other Matters” herein).DuringIn 2003 and 2004, our cash used by investing activities also included $4.5 million and $11.0 million, respectively, for net assetsacquired. 19acquired for 13 and 11, respectively, retail dry cleaning and laundry facilities operating in the Houston, Texas area. The following table details our capital expenditures (in millions):
2001 2002 2003 -------- -------- --------New store construction ........................... $ 13.3 $ 5.7 $ 7.9 Relocation and remodeling of existing stores ..... 27.8 23.6 15.0 Information technology ........................... 13.2 8.4 11.5 Distribution facilities .......................... 6.4 3.4 12.2 Other ............................................ 4.1 4.3 2.1 -------- -------- -------- Total ........................................ $ 64.8 $ 45.4 $ 48.7 ======== ======== ========
2002 2003 2004 New store construction $ 6.2 $ 8.1 $ 14.3 Relocation and remodeling of existing stores 25.1 15.8 18.9 Information technology 8.4 11.5 10.7 Distribution facilities 3.4 12.2 30.5 Other 4.3 2.1 11.0 Total $ 47.4 $ 49.7 $ 85.4 Property additions relating to new retail apparel stores include stores in various stages of completion at the end of the fiscal year
(three(no stores at the end of2001, no2002, eight stores at the end of20022003 and eight stores at the end of2003)2004). Our expenditures for the relocation and remodeling of existing retail apparel stores continue to be substantial as we have opened fewer new stores. Capital expenditures in20032004 also include approximately$9.0$10.0 million forexpansionthe centralization of our warehouse and distribution program for K&G in Houston, Texas and approximately $13.0 million related to our Canadian operations for the new tuxedo distributionfacilitycenter in Toronto, Ontario andadditional material handling equipmentfor the construction of a new warehouse and$1.9 million for two new concept stores under construction at the end of 2003.distribution center in Montreal, Quebec.We used net cash in financing activities of
$30.7 million in 2001 and$26.6 million in 2002 mainly for net payments of long-term debt and purchases of treasury stock.As previously noted, we entered into a new Canadian credit facility which was a term credit agreement under which we borrowed CAN$62.0 million (US $40.7 million) in January 2003. Borrowings under the term credit agreement were used to repay approximately CAN$60.9 million (US $40.0 million) in outstanding indebtedness of Moores under the previous term credit agreement.In 2003, net cash used in financing activities was $19.7 million due mainly to proceeds received from the issuance of the Notes in October 2003 and proceeds from the issuance of our common stock for options exercised, offset by purchases of treasury stock and the repayment ofour Canadian term loan.outstanding indebtedness. The treasury stock purchases were made under stock repurchase programs authorized by our Board of Directors in January 2000, January 2001, November 2002 and September 2003. Under the first three authorized programs, we repurchased1,185,000,1,480,000 and 1,057,100 shares of our common stock during2001,2002 and 2003, respectively, at a cost of$30.4 million,$28.1 million and $24.1 million, respectively. The average price per share of our common stock repurchased under these programs was$25.66,$18.96 and $22.80 during2001,2002 and 2003, respectively. In September 2003, the Board of Directors authorized a program for the repurchase of up to $100.0 million of Company common stock in the open market or in private transactions. This authorization superceded the approximately $1 million we had remaining under theBoard'sBoard’s November 2002 authorization. As of January 31, 2004, we had repurchased under this program 1,405,400 shares at a cost of $42.4 million in private transactions and 1,713,400 shares at a cost of $42.6 million in open market transactions. Under all authorized programs during fiscal 2003, we repurchased 4,175,900 shares of our common stock at a cost of $109.2 million with an average repurchase price of $26.15 per share. As of January 29, 2005, we had repurchased under the September 2003 program 1,405,400 shares at a cost of $42.4 million in private transactions and 2,036,400 shares at a cost of $51.4 million in open market transactions, for a total of 3,441,800 shares at an average price per share of $27.25.19
In 2004, net cash used in financing activities was $1.6 million due mainly to proceeds from the issuance of our common stock for options exercised, offset by purchases of treasury stock. In June 2004, the Board of Directors authorized a program for the repurchase of up to $50.0 million of our common stock in the open market or in private transactions. This authorization superceded the approximately $6.2 million we had remaining under the September 2003 authorization. As of January 29, 2005, a total of 99,400 shares at a cost of $2.5 million were repurchased in open market transactions under this program at an average price per share of $24.99. During fiscal 2004, a total of 422,400 shares at a cost of $11.2 million were repurchased in open market transactions under all authorized stock repurchase programs at an average price per share of $26.48.
In connection with our share repurchase programs, we from time to time issued put option contracts and received premiums for doing so, with the premiums being added to our capital in excess of par and effectively reducing the cost of our share repurchases. Under these contracts, the contract counterparties had the option to require us to purchase a specific number of shares of our common stock at specific strike prices per share on specific dates. During 2002, we issued a put contract for 500,000 shares and received a premium of $0.6 million for issuing this contract. The contract counterparty had the option to exercise this contract at a strike price of $22.76 per share on December 17, 2002, but contract completion was required earlier if the market price of our common stock fell below a trigger price of $12.64 per share. During the third quarter of 2002, the market price of our common stock fell below the trigger price and we settled the contract by repurchasing the 500,000 shares at $22.76 per share or $11.4 million; we recorded the shares purchased as treasury stock. We were not obligated to issue any shares under the put contract nor were we obligated to settle in cash.
Our primary cash requirements are to finance working capital increases as well as to fund capital expenditure requirements which are anticipated to be approximately
$57.0$60.0 million for2004.2005. This amount includes the anticipated costs of opening approximatelyeleven15 newMen'sMen’s Wearhouse stores,and eightsix new K&G stores and two Moores stores in20042005 at an expected average cost per store of approximately$0.3$0.4 million (excluding telecommunications and point-of-sale equipment and inventory). It also includes approximately$10.0$7.0 million for continued development of our distribution facilities in Houston for our K&G brand and future business models. The balance of the capital expenditures for20042005 will be used for telecommunications, point-of-sale and other computer equipment and systems, store relocations, remodeling and expansion and investment in complimentary services and concepts. The Company anticipates that each of theeleven15 newMen'sMen’s Wearhouse stores, each of the six new K&G stores and each of theeight new K&Gtwo Moores stores will require, on average, an initial inventory costing approximately $0.3 million, $1.4 million and$1.1$0.5 million, respectively (subject to thesameseasonal patternsaffectingthat affect inventory at all stores), which will be funded by our revolving credit facility, trade20credit and cash from operations.operations.The actual amount of future capital expenditures and inventory purchases will depend in part on the number of new stores opened and the terms on which new stores are leased. Additionally, the continuing consolidation of themen'smen’s tailored clothing industry may present us with opportunities to acquire retail chains significantly larger than our past acquisitions. Any such acquisitions may be undertaken as an alternative to opening new stores. We may use cash on hand, together with cash flow from operations, borrowings under our revolving credit facility and issuances of equity securities, to take advantage of significant acquisition opportunities.On August 16, 2004, we purchased a store (land and building, which we had been leasing) in Dallas, Texas for $1.0 million from 8239 Preston Road, Inc., a Texas corporation of which George Zimmer, Chairman of the Board and CEO of the Company, James E. Zimmer, Senior Vice President-Merchandising of the Company, and Richard Goldman, a former officer and director of the Company, each owned 20% of the outstanding common stock, and Laurie Zimmer, sister of George and James E. Zimmer, owned 40% of the outstanding common stock.
On August 20, 2004, we purchased a 1980 Gulfstream III aircraft from Regal Aviation L.L.C. (“Regal Aviation”) for $5.0 million. Regal Aviation operates a private air charter service and is a limited liability company of which George Zimmer owns 99%. In addition, on August 20, 2004, we entered into a leasing arrangement with Regal Aviation under which Regal Aviation will operate, manage and market the aircraft as well as provide the appropriate flight personnel and services. The aircraft will be utilized to provide air transportation from time to time for employees of the Company as well as be leased to third parties for charter.
On October 15, 2004, we purchased, a warehouse facility located in Houston, Texas (the “Facility”) from Zig Zag for $0.7 million. Zig Zag is a Texas joint venture, in which Richard E. Goldman, George Zimmer and James E. Zimmer were the sole and equal joint venturers. Prior to the purchase of the Facility, we leased the Facility from Zig Zag.
Based on the results of recent appraisals and review of the terms of other Regal Aviation leasing arrangements with unrelated third parties, we believe that the terms of the aircraft purchase and leasing agreements and the terms
20
of the store purchase and the Facility purchase are comparable to what would have been available to us from unaffiliated third parties at the time such agreements were entered into.
We anticipate that our existing cash and cash flow from operations, supplemented by borrowings under our various credit agreements, will be sufficient to fund planned store openings, other capital expenditures and operating cash requirements for at least the next 12 months.
As substantially all of our cash is held by
fivethree financial institutions, we are exposed to risk of loss in the event of failure of any of these parties. However, due to the creditworthiness of thesefivethree financial institutions, we anticipate full performance and access to our deposits and liquid investments.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
twoone financialinstitutions,institution, we are exposed to credit risk in the event of nonperformance bythese parties.this party. However, due to the creditworthiness ofthesethis major financialinstitutions,institution, 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.CONTRACTUAL OBLIGATIONSContractual Obligations
As of January
31, 2004,29, 2005, the Company is obligated to make cash payments in connection with its long-term debt, noncancelable capital and operating leases and purchase obligations in the amounts listed below. In addition, we utilize letters of credit primarily for inventory purchases. At January31, 2004,29, 2005, letters of credit totaling approximately$17.3$14.5 million were issued and outstanding.
Payments Due by Period <1 1-3 3-5 > 5 (In millions) Total Year Years Years Years Contractual obligations Long-term debt (a) $ 130.0 $ — $ — $ — $ 130.0 Capital lease obligations (b) 2.4 0.7 0.9 0.4 0.4 Operating lease base rentals (b) 461.0 95.4 155.1 110.0 100.5 Purchase obligations (c) 9.0 9.0 — — — Total contractual obligations $ 602.4 $ 105.1 $ 156.0 $ 110.4 $ 230.9
<1 1-3 3-5 > 5 CONTRACTUAL OBLIGATIONS Total Year Years Years Years - -------------------------------- -------- -------- -------- -------- --------(a) Long-term debt (a) $ 131.0 $ - $ - $ 1.0 $ 130.0 Operatingincludes our $130.0 million of 3.125% convertible senior notes issued in October 2003. Fixed interest due on these notes is $4.1 million, annually. These borrowings are further described in Note 1 and Note 3 of Notes to Consolidated Financial Statements. The table assumes our long-term debt is held to maturity.
(b) We lease retail business locations, office and warehouse facilities, copier equipment and automotive equipment under various noncancelable capital and operating leases. Leases on retail business locations specify minimum base rentals (b) 454.4 91.8 152.7 107.2 102.7 Purchaseplus common area maintenance charges and possible additional rentals based upon percentages of sales. Most of the retail business location leases provide for renewal options at rates specified in the leases. Our future lease obligations would change if we exercised these renewal options and if we entered into additional lease agreements. See Note 10 of Notes to Consolidated Financial Statements for more information.
(c) 15.4 15.4 - - - -------- -------- -------- -------- -------- Total contractualIncluded in purchase obligations $ 600.8 $ 107.2 $ 152.7 $ 108.2 $ 232.7 ======== ======== ======== ======== ========are our forward exchange contracts. At January 29, 2005, we had 24 contracts maturing in varying increments to purchase an aggregate notional amount of $9.0 million in foreign currency, maturing at various dates through December 2005. See Note 8 of Notes to Consolidated Financial Statements for more information.(a) Long-term debt includes our $130.0 million convertible senior notes issued in October 2003 and a $1.0 million unsecured note payable due in 2008. These borrowings are further described in Note 3 of Notes to Consolidated Financial Statements. The table assumes our long-term debt is held to maturity. (b) We lease retail business locations, office and warehouse facilities, copier equipment and automotive equipment under operating leases. Leases on retail business locations specify minimum base rentals plus common area maintenance charges and possible additional rentals based upon percentages of sales. Most of the retail business location leases provide for renewal options at rates specified in the leases. Our future operating lease obligations would change if we exercised these renewal options and if we entered into additional operating lease agreements. See Note 9 of Notes to Consolidated Financial Statements for more information. (c) Included in purchase obligations are our forward exchange contracts. At January 31, 2004, we had 23 contracts maturing in varying increments to purchase an aggregate notional amount of $15.4 million in foreign currency, maturing at various dates through January 2005. See Note 8 of Notes to Consolidated Financial Statements for more information. OFF-BALANCE SHEET ARRANGEMENTSOff-Balance Sheet Arrangements
Other than the noncancelable operating leases, forward exchange contracts and letters of credit discussed above, the Company does not have any off-balance sheet arrangements that are material to its financial position or results of operations.
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OTHER MATTERSOther Matters
In January 2000, we formed Chelsea Market Systems, L.L.C.
("Chelsea"(“Chelsea”), a joint venture company, for the purpose of developing a new point-of-sale software system for the Company and after successful implementation, exploring the possibility of marketing the system to third parties. Under the terms of the agreement forming Chelsea, we owned 50% of Chelsea and Harry M. Levy, a former director and officer, owned 50% with the understanding that Mr. Levywouldcould assign, either directly or indirectly, some of his interest in Chelsea to other persons involved in the project. The point-of-sale system was developed and successfully deployed by the Company during 2000 and 2001. From January 2000 though March 2002, we funded and recognized as expense all of the operating costs of Chelsea, which aggregated $4.5 million. On March 31, 2002, Chelsea sold substantially all of its assets, primarily certain technology assets, to an unrelated company regularly engaged in the development and licensing of software to the retail industry. As a result of the sale by Chelsea, the Company received a net amount of $6.8 million. Approximately $4.4 million of this amount was recognized as a pretax operating gain by the Company in the first quarter of 2003.IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTSHowever, the gain recognized was more than offset by $2.9 million in costs related to store closures, $2.5 million in costs related to the write-off of certain technology assets and $3.7 million in litigation costs related to certain California lawsuits.Impact of Recently Issued Accounting Pronouncements
In
December 2003,November 2004, the FASB issueda revised interpretationStatement ofFASB InterpretationFinancial Accounting Standards No.46, "Consolidation- “Inventory Costs - an Amendment ofVariable Interest Entities, an Interpretation ofAccounting Research Bulletin (“ARB”) No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 amends ARB No.51 (revised December 2003)" ("FIN 46R"). FIN 46R43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current period charges. It also requires thatif an entity has a controlling financial interest in a variable interest entity,allocation of fixed production overheads to theassets, liabilities and resultscosts ofactivitiesconversion be based on the normal capacity of thevariable interest entity should be included in the consolidated financial statements of the entity. FIN 46Rproduction facilities. SFAS No. 151 is effective forall new variable interest entities created or acquiredfiscal years beginning afterJanuary 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46R must be applied no later than December 31, 2003 for entities meeting the definition of special-purpose entities, and no later than fiscal periods ending after MarchJune 15,2004 for all other entities under construction. As we2005. We do nothave any variable interest entities,expect the adoption ofFIN 46R is not expectedSFAS No. 151 to have a material impact on our financial position, results of operations or cash flows.INFLATIONIn December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. This Statement establishes the fair value method for measurement and requires all entities to apply this fair value method in accounting for share-based payment transactions. The amount of compensation cost will be measured based on the grant-date fair value of the instrument issued and will be recognized over the vesting period. SFAS No. 123R replaces SFAS 123 and supersedes APB No. 25. The provisions of SFAS No. 123R are effective for the first fiscal year beginning after June 15, 2005, for all awards granted or modified after that date and for those awards granted prior to that date that have not vested.
SFAS No. 123R requires companies to assess the most appropriate model to calculate the value of the options. In addition, there are a number of other requirements under the new standard that will result in differing accounting treatment than currently required. These differences include, but are not limited to, the accounting for the tax benefit on employee stock options and for stock issued under our employee stock purchase plan. In addition to the appropriate fair value model to be used for valuing share-based payments, we will also be required to determine the transition method to be used at date of adoption. The allowed transition methods include modified prospective and modified retroactive adoption options. Under the modified retroactive options, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The modified prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS No. 123R, while the modified retroactive method would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. We plan to adopt SFAS No. 123R at the beginning of fiscal 2006 using the modified prospective method.
Upon adoption, SFAS No. 123R will have a significant impact on our consolidated financial statements as we will be required to expense the fair value of our stock option grants and stock purchases under our employee stock purchase plan rather than disclose the impact on our consolidated net earnings and net earnings per share within our footnotes, as is our current practice in accordance with SFAS No. 123. The impact of adoption of SFAS No. 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123R in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net earnings and pro forma net earnings per share in Note 1 to our consolidated financial statements.
22
Inflation
The impact of inflation on the Company has been minimal.
22FORWARD-LOOKING STATEMENTSForward-Looking Statements
Certain statements made herein and in other public filings and releases by the Company contain
"forward-looking"“forward-looking” information (as defined in the Private Securities Litigation Reform Act of 1995) that involves risk and uncertainty. These forward-looking statements may include, but are not limited to, future capital expenditures, acquisitions (including the amount and nature thereof), future sales, earnings, margins, costs, number and costs of store openings, demand for clothing, market trends in the retail 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, thisManagement'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations section and other sections of our 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.
Expansion into more fashion-oriented merchandise categories or into complementary products and services may present greater risks. We are continuously assessing opportunities to expand complementary products and services related to our traditional business, such as corporate apparel sales and retail dry cleaning
establishments, as well as concepts that include more fashion-oriented merchandise.establishments. We may expend both capital and personnel resources on such business opportunities which may or may not be successful.Our business is particularly sensitive to economic conditions and consumer confidence. Consumer confidence is often adversely impacted by many factors including local, regional or national economic conditions, continued threats of terrorism, acts of war and other uncertainties. We believe that a decrease in consumer spending will affect us more than other retailers because
men'smen’s discretionary spending for items like tailored apparel tends to slow faster than other retail purchases.According to industry sources, sales in the
men'smen’s tailored clothing market generally have declined over the past severalyears.years and increased only modestly in 2004. We believe that thisdeclinetrend is attributable primarily to: (1) men allocating less of their income to tailored clothing and (2) certain employers relaxing their dress codes. We believe that thisdecreasetrend in sales has contributed, and will continue to contribute, to a consolidation among retailers ofmen'smen’s tailored clothing.Despite this overall decline,Although we have been able to increase our share of themen'smen’s tailored clothingmarket; however,market, we may not be able to continue to expand our sales volume or maintain our profitability within our segment of the retailing industry.23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to exposure from fluctuations in U.S. dollar/Euro exchange rates. As further described in Note 8 of Notes to Consolidated Financial Statements and Item 7,
"Management's“Management’s Discussion and Analysis of FinancialInformationCondition and Results of Operations-– Liquidity and CapitalResources"Resources”, we utilize foreign currency forward exchange contracts to limit exposure to changes in currency exchange rates. At January 29, 2005, we had 24 contracts maturing in varying increments to purchase an aggregate notional amount of $9.0 million in foreign currency, maturing at various dates through December 2005. At January 31, 2004, we had 23 contracts maturing in varying increments to purchase an aggregate notional amount of $15.4 million in foreign currency, maturing at various dates through January 2005.At February 1, 2003, we had four contracts maturing in varying increments to purchase an aggregate notional amount of $1.4 million in foreign currency, maturing at various dates through March 2003.Unrealized pretax losseson these forward contracts totaled approximately $0.2 million at February 1, 2003. Unrealized pretax gainson these forward contracts totaled approximately $1.0 million at January 31, 2004. Unrealized pretax gains on these forward contracts totaled approximately $0.6 million at January 29, 2005. A hypothetical 10% change in applicable January31, 200429, 2005 forward rates would increase or decrease this pretax gain by approximately$1.5$0.9 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.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed under the supervision of our principal executive and principal financial officers, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of the end of our most recent fiscal year. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. Based on such assessment, management concluded that, as of January 29, 2005, our internal control over financial reporting is effective based on those criteria.
In reaching its conclusion that the internal control over financial reporting was effective as of January 29, 2005, management carefully considered the facts and circumstances surrounding the restatement of the Company’s previously issued financial statements.
A control deficiency in monitoring compliance with generally accepted accounting principles in the area of accounting for operating leases with scheduled rent increases, the related period of amortization of leasehold improvements and the classification of leasehold incentives received was detected during our assessment process that resulted in cumulative, non-cash adjustments that would have been material to the financial performance of fiscal 2004. As a result, management decided to restate previously issued financial statements (as more fully described in Note 13 to the consolidated financial statements) for the effect of the correction on the prior period results.
The impact of this correction on the periods subject to restatement was immaterial. Substantially all of the adjustment related to periods prior to fiscal 2002, and the correcting cumulative adjustment was also immaterial to shareholders’ equity as of February 2, 2002. As a result, management concluded that this control deficiency was not a material weakness.
Management’s assessment of the effectiveness of our internal control over financial reporting as of January 29, 2005 has been audited by Deloitte & Touche LLP, the independent registered public accounting firm that audited our consolidated financial statements included in this report, as stated in their report which appears on page 26 of this Annual Report on Form 10-K.
25
REPORT OF INDEPENDENT
AUDITORS' REPORTREGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Shareholders of
TheMen'sMen’s Wearhouse, Inc.
Houston, TexasWe have audited management’s assessment, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting”, that The Men’s Wearhouse, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of January 29, 2005, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of January 29, 2005, is fairly stated, in all material respects, based on the criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 29, 2005, based on the criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedules as of and for the year ended January 29, 2005 of the Company and our report dated April 25, 2005 expressed an unqualified opinion on those financial statements and financial statement schedules and included an explanatory paragraph regarding the restatement of fiscal 2003 and 2002 consolidated financial statements.
/s/ DELOITTE & TOUCHE LLP Houston, Texas
April 25, 200526
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
The Men’s Wearhouse, Inc.
Houston, TexasWe have audited the accompanying consolidated balance sheets of The
Men'sMen’s Wearhouse, Inc. anditssubsidiaries (the"Company"“Company”) as of January 29, 2005 and January 31, 2004,and February 1, 2003,and the related consolidated statements of earnings,shareholders'shareholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended January31, 2004.29, 2005. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of theCompany'sCompany’s management. Our responsibility is to express an opinion onthesethe financial statements and financial statement schedules based on our audits.We conducted our audits in accordance with
auditingthe standardsgenerally accepted inof theUnited States of America.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
the CompanyThe Men’s Wearhouse, Inc. and subsidiaries as of January 29, 2005 and January 31, 2004, andFebruary 1, 2003, andthe results ofitstheir operations anditstheir cash flows for each of the three years in the period ended January31, 200429, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of January 29, 2005, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 25, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
As discussed in Note
1 to13, the accompanying fiscal 2003 and 2002 consolidated financial statementsthe Company changed its method of accounting for goodwill and other intangible assets effective February 3, 2002 to conform to Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," as amended. /s/ DELOITTE & TOUCHE LLP Houston, Texas April 5, 2004 25have been restated.
/s/ DELOITTE & TOUCHE LLP Houston, Texas
April 25, 200527
THE
MEN'SMEN’S WEARHOUSE, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES)
FEBRUARY 1, JANUARY 31, 2003 2004 ----------- ----------ASSETS CURRENT ASSETS: Cash ........................................................ $ 84,924 $ 132,146 Accounts receivable, net .................................... 20,004 17,919 Inventories ................................................. 360,159 388,956 Other current assets ........................................ 29,495 30,858 ----------- ---------- Total current assets ..................................... 494,582 569,879 ----------- ---------- PROPERTY AND EQUIPMENT, AT COST: Land ........................................................ 6,005 6,205 Buildings ................................................... 23,729 29,739 Leasehold improvements ...................................... 162,734 177,466 Furniture, fixtures and equipment ........................... 213,391 241,742 ----------- ----------- 405,859 455,152 Less accumulated depreciation and amortization .............. (195,679) (240,088) ----------- ----------- Net property and equipment ............................... 210,180 215,064 ----------- ----------- GOODWILL, net ................................................. 36,607 43,867 OTHER ASSETS, net ............................................. 27,944 40,388 ----------- ----------- TOTAL ............................................... $ 769,313 $ 869,198 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ............................................ $ 98,716 $ 115,828 Accrued expenses ............................................ 55,323 71,132 Current portion of long-term debt ........................... 2,037 -- Income taxes payable ........................................ 13,234 26,096 ----------- ----------- Total current liabilities ................................ 169,310 213,056 LONG-TERM DEBT ................................................ 38,709 131,000 DEFERRED TAXES AND OTHER LIABILITIES .......................... 29,533 31,682 ----------- ----------- Total liabilities ........................................ 237,552 375,738 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Note 9) SHAREHOLDERS' EQUITY: Preferred stock, $.01 par value, 2,000,000 shares authorized, no shares issued ......................................... -- -- Common stock, $.01 par value, 100,000,000 shares authorized, 42,585,179 and 43,054,815 shares issued ...... 426 431 Capital in excess of par .................................... 196,146 205,636 Retained earnings ........................................... 397,540 447,566 Accumulated other comprehensive income ...................... 66 10,533 ----------- ----------- Total .................................................... 594,178 664,166 Treasury stock, 2,845,364 and 6,979,423 shares at cost ..... (62,417) (170,706) ----------- ----------- Total shareholders' equity ............................... 531,761 493,460 ----------- ----------- TOTAL ............................................... $ 769,313 $ 869,198 =========== ===========
(In thousands, except shares)
January 31, January 29, 2004 2005 (as restated- note 13) CURRENT ASSETS: Cash and cash equivalents $ 132,146 $ 165,008 Accounts receivable, net 17,919 20,844 Inventories 388,956 406,225 Other current assets 31,028 34,920 Total current assets 570,049 626,997 PROPERTY AND EQUIPMENT, AT COST: Land 6,205 8,878 Buildings 29,739 50,511 Leasehold improvements 196,490 219,250 Furniture, fixtures and equipment 241,742 275,822 474,176 554,461 Less accumulated depreciation and amortization (250,353 ) (294,393 ) Net property and equipment 223,823 260,068 GOODWILL 43,867 55,824 OTHER ASSETS, net 40,388 50,433 TOTAL $ 878,127 $ 993,322 CURRENT LIABILITIES: Accounts payable $ 115,828 $ 132,212 Accrued expenses 71,132 82,923 Income taxes payable 26,044 23,633 Total current liabilities 213,004 238,768 LONG-TERM DEBT 131,000 130,000 DEFERRED TAXES AND OTHER LIABILITIES 46,331 55,706 Total liabilities 390,335 424,474 COMMITMENTS AND CONTINGENCIES (Note 3 and Note 10) SHAREHOLDERS’ EQUITY: Preferred stock, $.01 par value, 2,000,000 shares authorized, no shares issued — — Common stock, $.01 par value, 100,000,000 shares authorized, 43,054,815 and 43,593,587 shares issued 431 436 Capital in excess of par 205,636 218,327 Retained earnings 442,074 513,430 Accumulated other comprehensive income 10,357 17,477 Total 658,498 749,670 Treasury stock, 6,979,423 and 7,358,079 shares at cost (170,706 ) (180,822 ) Total shareholders’ equity 487,792 568,848 TOTAL $ 878,127 $ 993,322 The accompanying notes are an integral part of these consolidated financial statements.
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THE
MEN'SMEN’S WEARHOUSE, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED FEBRUARY 2, 2002, FEBRUARY
For the Years Ended
February 1, 2003,AND JANUARYJanuary 31, 2004,(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)and January 29, 2005
FISCAL YEAR ------------------------------------ 2001 2002 2003 ---------- ---------- ----------Net sales ................................................. $1,273,154 $1,295,049 $1,392,680 Cost of goods sold, including buying and occupancy costs .. 822,043 840,701 878,737 ---------- ---------- ---------- Gross margin .............................................. 451,111 454,348 513,943 Selling, general and administrative expenses .............. 377,270 384,956 431,695 ---------- ---------- ---------- Operating income .......................................... 73,841 69,392 82,248 Interest expense (net of interest income of $841, $981 and $1,495, respectively) .................... 2,867 1,261 2,511 ---------- ---------- ---------- Earnings before income taxes .............................. 70,974 68,131 79,737 Provision for income taxes ................................ 27,698 25,719 29,711 ---------- ---------- ---------- Net earnings .............................................. $ 43,276 $ 42,412 $ 50,026 ========== ========== ========== Net earnings per share: Basic ................................................... $ 1.06 $ 1.04 $ 1.29 ========== ========== ========== Diluted ................................................. $ 1.04 $ 1.04 $ 1.27 ========== ========== ========== Weighted average shares outstanding: Basic ................................................... 40,997 40,590 38,789 ========== ========== ========== Diluted ................................................. 41,446 40,877 39,295 ========== ========== ==========
(In thousands, except per share amounts)
Fiscal Year 2002 2003 2004 (as restated- (as restated- note 13) note 13) Net sales $ 1,295,049 $ 1,392,680 $ 1,546,679 Cost of goods sold, including buying, distribution and occupancy costs 840,810 879,234 943,675 Gross margin 454,239 513,446 603,004 Selling, general and administrative expenses 384,939 431,663 484,916 Operating income 69,300 81,783 118,088 Interest income (981 ) (1,495 ) (1,526 ) Interest expense 2,242 4,006 5,899 Earnings before income taxes 68,039 79,272 113,715 Provision for income taxes 25,684 29,538 42,359 Net earnings $ 42,355 $ 49,734 $ 71,356 Net earnings per share: Basic $ 1.04 $ 1.28 $ 1.98 Diluted $ 1.04 $ 1.27 $ 1.94 Weighted average common shares outstanding: Basic 40,590 38,789 36,029 Diluted 40,877 39,295 36,813 The accompanying notes are an integral part of these consolidated financial statements.
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THE
MEN'SMEN’S WEARHOUSE, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF
SHAREHOLDERS'SHAREHOLDERS’ EQUITYFOR THE YEARS ENDED FEBRUARY 2, 2002, FEBRUARYAND COMPREHENSIVE INCOME
For the Years Ended
February 1, 2003,AND JANUARY 31.January 31, 2004(IN THOUSANDS, EXCEPT SHARES)and January 29, 2005
ACCUMULATED CAPITAL OTHER COMMON IN EXCESS RETAINED COMPREHENSIVE TREASURY STOCK OF PAR EARNINGS (LOSS) INCOME STOCK TOTAL ------ --------- --------- ------------- --------- ----------BALANCE -- February 3, 2001.............. $ 422 $ 189,656 $ 311,852 $ (316) $ (6,627) $ 494,987 Comprehensive income: Net earnings......................... -- -- 43,276 -- -- 43,276 Translation adjustment............... -- -- -- (2,157) -- (2,157) Cumulative effect of accounting change on derivative instruments... -- -- -- (331) -- (331) Change in derivative fair value...... -- -- -- (394) -- (394) ---------- Total comprehensive income...... 40,394 Common stock issued to stock discount plan -- 56,617 shares....... 1 940 -- -- -- 941 Common stock issued upon exercise of stock options -- 79,479 shares...... 1 1,211 -- -- -- 1,212 Tax benefit recognized upon exercise of stock options..................... -- 258 -- -- -- 258 Treasury stock purchased -- 1,185,000 shares............................... -- -- -- -- (30,409) (30,409) Treasury stock issued to profit sharing plan -- 106,382 shares...... -- (177) -- -- 2,677 2,500 ------ --------- --------- --------- --------- ---------- BALANCE -- February 2, 2002.............. 424 191,888 355,128 (3,198) (34,359) 509,883 Comprehensive income: Net earnings......................... -- -- 42,412 -- -- 42,412 Translation adjustment............... -- -- -- 2,442 -- 2,442 Change in derivative fair value...... -- -- -- 822 822 ---------- Total comprehensive income...... 45,676 Common stock issued to stock discount plan -- 51,359 shares....... 1 761 -- -- -- 762 Common stock issued upon exercise of stock options -- 165,105 shares...... 1 2,272 -- -- -- 2,273 Tax benefit recognized upon exercise of stock options..................... -- 624 -- -- -- 624 Proceeds from sale of put option contracts............................ -- 601 -- -- -- 601 Treasury stock purchased -- 1,480,000 shares............................... -- -- -- -- (28,058) (28,058) ------ --------- --------- --------- --------- ---------- BALANCE -- February 1, 2003.............. $ 426 $ 196,146 $ 397,540 $ 66 $ (62,417) $ 531,761 Comprehensive income: Net earnings........................ -- -- 50,026 -- -- 50,026 Translation adjustment.............. -- -- -- 9,908 -- 9,908 Change in derivative fair value..... -- -- -- 559 -- 559 ---------- Total comprehensive income 60,493 Common stock issued to stock discount plan -- 48,195 shares...... 1 742 -- -- -- 743 Common stock issued upon exercise of stock options -- 421,441 shares..... 4 7,573 -- -- -- 7,577 Tax benefit recognized upon exercise of stock options.................... -- 1,572 -- -- -- 1,572 Treasury stock issued to profit sharing plan - 41,841 shares........ -- (397) -- -- 897 500 Treasury stock purchased -- 4,175,900 shares.............................. -- -- -- -- (109,186) (109,186) ------ --------- --------- --------- --------- ---------- BALANCE -- January 31, 2004............. $ 431 $ 205,636 $ 447,566 $ 10,533 $(170,706) $ 493,460 ====== ========= ========= ========= ========= ==========
(In thousands, except shares)
Accumulated Capital Other Common in Excess Retained Comprehensive Treasury Stock of Par Earnings (Loss) Income Stock Total BALANCE — February 2, 2002 (as previously reported) $ 424 $ 191,888 $ 355,128 $ (3,198 ) $ (34,359 ) $ 509,883 Cumulative effect on prior years of restatement (note 13) — — (5,143 ) 69 — (5,074 ) BALANCE — February 2, 2002 (as restated-note 13) 424 191,888 349,985 (3,129 ) (34,359 ) 504,809 Comprehensive income: Net earnings (as restated-note 13) — — 42,355 — — 42,355 Translation adjustment (as restated-note 13) — — — 2,397 — 2,397 Change in derivative fair value — — — 822 — 822 Total comprehensive income (as restated-note 13) 45,574 Common stock issued to stock discount plan — 51,359 shares 1 761 — — — 762 Common stock issued upon exercise of stock options — 165,105 shares 1 2,272 — — — 2,273 Tax benefit recognized upon exercise of stock options — 624 — — — 624 Proceeds from sale of put option contracts — 601 — — — 601 Treasury stock purchased — 1,480,000 shares — — — — (28,058 ) (28,058 ) BALANCE — February 1, 2003 (as restated-note 13) 426 196,146 392,340 90 (62,417 ) 526,585 Comprehensive income: Net earnings (as restated-note 13) — — 49,734 — — 49,734 Translation adjustment (as restated-note 13) — — — 9,708 — 9,708 Change in derivative fair value — — — 559 — 559 Total comprehensive income (as restated- note 13) 60,001 Common stock issued to stock discount plan — 48,195 shares 1 742 — — — 743 Common stock issued upon exercise of stock options — 421,441 shares 4 7,573 — — — 7,577 Tax benefit recognized upon exercise of stock options — 1,572 — — — 1,572 Treasury stock issued to profit sharing plan - 41,841 shares — (397 ) — — 897 500 Treasury stock purchased — 4,175,900 shares — — — — (109,186 ) (109,186 ) BALANCE —January 31, 2004 (as restated-note 13) 431 205,636 442,074 10,357 (170,706 ) 487,792 Comprehensive income: Net earnings — — 71,356 — — 71,356 Translation adjustment — — — 7,371 — 7,371 Change in derivative fair value — — — (251 ) — (251 ) Total comprehensive income 78,476 Common stock issued to stock discount plan — 49,211 shares — 1,120 — — — 1,120 Common stock issued upon exercise of stock options — 489,561 shares 5 9,751 — — — 9,756 Tax benefit recognized upon exercise of stock options — 1,768 — — — 1,768 Amortization of deferred compensation — 122 — — — 122 Treasury stock issued to profit sharing plan – 43,744 shares — (70 ) — — 1,070 1,000 Treasury stock purchased — 422,400 shares — — — — (11,186 ) (11,186 ) BALANCE — January 29, 2005 $ 436 $ 218,327 $ 513,430 $ 17,477 $ (180,822 ) $ 568,848 The accompanying notes are an integral part of these consolidated financial statements.
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THE
MEN'SMEN’S WEARHOUSE, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 2, 2002, FEBRUARY
For the Years Ended
February 1, 2003,AND JANUARYJanuary 31, 2004(IN THOUSANDS)and January 29, 2005
FISCAL YEAR ----------------------------------- 2001 2002 2003 --------- --------- ---------CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings ...................................................... $ 43,276 $ 42,412 $ 50,026 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization .................................. 41,949 44,284 48,130 Gain on sale of assets ......................................... -- -- (4,381) Deferred tax provision ......................................... 3,354 7,485 505 (Increase) decrease in inventories ................................ (22,773) 17,338 (21,624) Increase in other assets .......................................... (8,995) (13,594) (3,246) Increase in accounts payable and accrued expenses ................. 719 19,503 35,491 Increase (decrease) in income taxes payable ....................... (6,949) (4,933) 14,086 Increase (decrease) in other liabilities .......................... 1,721 531 (220) --------- --------- --------- Net cash provided by operating activities ................. 52,302 113,026 118,767 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures .............................................. (64,777) (45,422) (48,700) Net proceeds from sale of assets .................................. -- 6,812 -- Net assets acquired ............................................... -- -- (4,500) Investment in trademarks, tradenames and other assets ............. (1,590) (2,619) (1,644) --------- --------- --------- Net cash used in investing activities ..................... (66,367) (41,229) (54,844) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock ............................ 2,153 3,035 8,320 Proceeds from issuance of debt .................................... -- -- 130,000 Bank borrowings ................................................... -- 39,624 -- Principal payments on bank debt ................................... (2,407) (40,743) (44,931) Deferred financing costs .......................................... -- (1,075) (3,916) Proceeds from sale of put option contracts ........................ -- 601 -- Purchase of treasury stock ........................................ (30,409) (28,058) (109,186) --------- --------- --------- Net cash used in financing activities ..................... (30,663) (26,616) (19,713) --------- --------- --------- Effect of exchange rate changes on cash ............................. (1,054) 1,099 3,012 --------- --------- --------- INCREASE (DECREASE) IN CASH ......................................... (45,782) 46,280 47,222 Cash beginning of period .......................................... 84,426 38,644 84,924 --------- --------- --------- Cash end of period ................................................ $ 38,644 $ 84,924 $ 132,146 ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest ........................................................ $ 3,468 $ 1,945 $ 2,091 ========= ========= ========= Income taxes .................................................... $ 32,539 $ 25,582 $ 15,863 ========= ========= ========= SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Additional capital in excess of par resulting from tax benefit recognized upon exercise of stock options ...................... $ 258 $ 624 $ 1,572 ========= ========= ========= Treasury stock contributed to employee stock plan ................. $ 2,500 $ -- $ 500 ========= ========= ========= Note payable issued as partial consideration for assets acquired .. $ -- $ -- $ 1,000 ========= ========= =========
(In thousands)
Fiscal Year 2002 2003 2004 (as restated- (as restated- note 13) note 13) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 42,355 $ 49,734 $ 71,356 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 46,885 50,993 53,319 Deferred compensation and rent expense (1,939 ) (1,670 ) (1,373 ) Gain on sale of assets — (4,381 ) — Loss on impairment of assets — 2,515 2,169 Deferred tax provision 7,468 342 5,222 (Increase) decrease in accounts receivable (3,596 ) 2,809 (2,579 ) (Increase) decrease in inventories 17,338 (21,624 ) (13,709 ) Increase in other assets (9,998 ) (8,570 ) (12,419 ) Increase in accounts payable and accrued expenses 19,613 35,491 28,060 Increase (decrease) in income taxes payable (4,951 ) 14,076 (903 ) Increase in other liabilities 1,809 15 836 Net cash provided by operating activities 114,984 119,730 129,979 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (47,380 ) (49,663 ) (85,392 ) Net proceeds from sale of assets 6,812 — — Net assets acquired — (4,500 ) (11,000 ) Investment in trademarks, tradenames and other assets (2,619 ) (1,644 ) (556 ) Net cash used in investing activities (43,187 ) (55,807 ) (96,948 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 3,035 8,320 10,876 Proceeds from issuance of debt — 130,000 — Bank borrowings 39,624 — — Principal payments on debt (40,743 ) (44,931 ) (1,000 ) Deferred financing costs (1,075 ) (3,916 ) (276 ) Proceeds from sale of put option contracts 601 — — Purchase of treasury stock (28,058 ) (109,186 ) (11,186 ) Net cash used in financing activities (26,616 ) (19,713 ) (1,586 ) Effect of exchange rate changes 1,099 3,012 1,417 INCREASE IN CASH AND CASH EQUIVALENTS 46,280 47,222 32,862 Balance at beginning of period 38,644 84,924 132,146 Balance at end of period $ 84,924 $ 132,146 $ 165,008 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 1,945 $ 2,091 $ 4,671 Income taxes $ 25,582 $ 15,863 $ 38,820 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Additional capital in excess of par resulting from tax benefit recognized upon exercise of stock options $ 624 $ 1,572 $ 1,768 Treasury stock contributed to employee stock plan $ — $ 500 $ 1,000 Note payable issued as partial consideration for assets acquired $ — $ 1,000 $ — The accompanying notes are an integral part of these consolidated financial statements.
2931
THE
MEN'SMEN’S WEARHOUSE, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 2, 2002 FEBRUARY
For the Years Ended February 1, 2003,AND JANUARY
January 31, 2004 and January 29, 20051. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
--— TheMen'sMen’s Wearhouse, Inc. and its subsidiaries (the"Company"“Company”) is a specialty retailer of menswear. We operate throughout the United States primarily under the brand names ofMen'sMen’s Wearhouse and K&G and under the brand name of Moores in Canada. We follow the standard fiscal year of the retail industry, which is a 52-week or 53-week period ending on the Saturday closest to January 31. Fiscal year2001 ended on February 2, 2002, fiscal year2002 ended on February 1, 2003,andfiscal year 2003 ended on January 31,2004.2004 and fiscal year 2004 ended on January 29, 2005. Fiscal years2001,2002, 2003 and20032004 included 52 weeks.Principles of Consolidation
--— The consolidated financial statements include the accounts of TheMen'sMen’s Wearhouse, Inc. and its wholly owned or controlled subsidiaries. Intercompany accounts and transactions have been eliminated in the consolidated financial statements.Use of Estimates
--— The preparation of financial statements in conformity with accountingprincipalsprinciples generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates and assumptions are those relating to inventories and long-lived assets, including goodwill,andour estimated liabilities for self-insured portions of ourworkers'workers’ compensation and employee health benefitcosts.costs and our estimates relating to income taxes.Cash
--and Cash Equivalents— Cash and cash equivalents includes all cash in banks, cash on hand and all highly liquid investments with an original maturity of three months or less. As substantially all of our cash is held byfivethree financial institutions, we are exposed to risk of loss in the event of failure of any of these parties. However, due to the creditworthiness of thesefivethree financial institutions, we anticipate full performance and access to our deposits and liquid investments.Accounts Receivable
--—Accounts receivable consists of our receivables from third-party credit cardreceivablesproviders and other receivables, net of an allowance for uncollectible accounts of $0.4 million at fiscal year end20022003 and2003.2004. Collectibility is reviewed regularly and the allowance is adjusted as necessary.Inventories
--— Inventories are valued at the lower of cost or market, with cost determined on the average cost method and the retail cost method. Inventory cost includes procurement and distribution costs (warehousing, freight, hangers and merchandising costs) associated with ending inventory.Property and Equipment
--— Property and equipment are stated at cost. Normal repairs and maintenance costs are charged to earnings as incurred and additions and major improvements are capitalized. The cost of assets retired or otherwise disposed of and the related allowances for depreciation are eliminated from the accounts in theyearperiod of disposal and the resulting gain or loss is credited or charged to earnings.Buildings are depreciated using the straight-line method over their estimated useful lives of 20 to 25 years. Depreciation of leasehold improvements is computed on the straight-line method over the term of the lease, which is generally five to ten years based on the initial lease term plus first renewal option periods that are reasonably assured, or the useful life of the assets, whichever is shorter. Furniture, fixtures and equipment are depreciated using primarily the straight-line method over their estimated useful lives of three to ten years.
Goodwill and Other Assets
-- We adopted the provisions of Statement of Financial Accounting Standard No. 142 "Goodwill and Other—IntangibleAssets" ("SFAS No. 142") on February 3, 2002. Accordingly, intangibleassets are initially recorded at their fair values. Identifiable intangible assets with finite useful lives are amortized to expense over the estimated useful life of the asset. Trademarks, tradenames and other intangibles are amortized over estimated useful lives of 3 to 17 years using the straight-line method. Identifiable intangible assets with an indefinite useful life, including goodwill, are evaluatedat leastannually in the fourth quarter or more frequently if circumstances dictate, for impairment by comparison of their carrying amounts with the fair value of the individual assets.The adoption of SFAS No. 142 did not resultNo impairment was identified inany impairment charge. The disclosures required by SFAS No. 142 are included in Note 7. 30fiscal 2002, 2003 or 2004. 32
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Impairment of Long-Lived Assets
-- We adopted Statement of Financial Accounting Standard No. 144 "Impairment or Disposal of Long-lived Assets" ("SFAS No. 144") on February 3, 2002.—We evaluate the carrying value of long-lived assets, such as property and equipment and amortizable intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined, based on estimated undiscounted future cash flows, that an impairment has occurred, a loss is recognized currently for the impairment.The adoption of this statement did not have a material impact on our financial position, results of operations or cash flows.Fair Value of Financial Instruments
--— As ofFebruary 1, 2003January 31, 2004 and January31, 2004,29, 2005, management estimates that the fair value of cash and cash equivalents, receivables, accounts payable and accrued expenses are carried at amounts that reasonably approximate their fair value. See Note 3 for the fair values of our long-term debt.Revenue Recognition
--—Revenue is recognized at the time of sale and delivery of merchandise, net of actual sales returns and a provision for estimated salesreturns.returns, and excludes sales taxes. Revenues from alteration and other services are recognized upon completion of thealterationservices. Proceeds from the sale of gift cards are recorded as a liability and are recognized as revenues when the cards are redeemed.Loyalty Program— We maintain a customer loyalty program in our Men’s Wearhouse and Moores stores in which customers receive points for purchases. Points are equivalent to dollars spent on a one-to-one basis, excluding any sales tax dollars. Upon reaching 500 points, customers are issued a $50 rewards certificate which they may redeem for purchases at our Men’s Wearhouse or Moores stores. Generally, reward certificates earned must be redeemed no later than six months from the date of issuance. We accrue the estimated costs of the anticipated certificate redemptions when the certificates are issued and charge such costs to cost of goods sold. Redeemed certificates are recorded as markdowns when redeemed and no revenue is recognized for the redeemed certificate amounts. The estimate of costs associated with the loyalty program requires us to make assumptions related to the cost of product or services to be provided to customers when the certificates are redeemed as well as redemption rates.
Vendor Allowances— 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 a material impact on the Company’s financial position, results of operations or cash flows. Vendor allowances are recognized as a reduction of the costs of the merchandise purchased.
Shipping and Handling Costs— All shipping and handling costs for product sold are recognized as cost of goods sold.
Operating Leases— Operating leases relate primarily to stores and generally contain rent escalation clauses, rent holidays, contingent rent provisions and occasionally leasehold incentives. Rent expense for operating leases is recognized on a straight-line basis over the term of the lease, which is generally five to ten years based on the initial lease term plus first renewal option periods that are reasonably assured. Rent expense for stores is included in cost of sales as a part of occupancy cost and other rent is included in selling general and administrative expenses. The lease terms commence when we take possession with the right to control use of the leased premises and, for stores, is generally 60 days prior to the date rent payments begin. We capitalize rent amounts allocated to the construction period for leased properties as leasehold improvements. Deferred rent that results from recognition of rent on a straight-line basis is included in other liabilities. Landlord incentives received for reimbursement of leasehold improvements are recorded as deferred rent and amortized as a reduction to rent expense over the term of the lease. Contingent rentals are generally based on percentages of sales and are recognized as store rent expense as they accrue.
Advertising
--— Advertising costs are expensed as incurred or, in the case of media production costs, when the commercial first airs. Advertising expenses were$61.2 million,$60.1 million, $62.9 million and$62.9$60.5 million in fiscal2001,2002, 2003 and2003,2004, respectively.Shipping and Handling Costs -- All shipping and handling costs for product sold are recognized as cost of goods sold.New Store Costs
--— Promotion and other costs associated with the opening of new stores are expensed as incurred.33
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Store Closures and Relocations
--— On November 3, 2002, we adopted Statement of Financial Accounting Standards No. 146,"Accounting“Accounting for Costs Associated with Exit or DisposalActivities" ("Activities” (“SFAS No.146"146”). This statement 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. As of the fourth quarter of 2002, when we close or relocate a store, the present value of estimated unrecoverable cost, which is substantially made up of the remaining net lease obligation, is charged to expense. Prior to the fourth quarter of 2002, these costs were expensed uponmanagement'smanagement’s commitment to closing or relocating a store, which was generally before the actual liability was incurred. The adoption of this statement did not have a material impact on our financial position, results of operations or cash flows.Stock Based Compensation
--— As permitted by Statement of Financial Accounting Standards No. 123,"Accounting“Accounting for Stock-BasedCompensation" ("Compensation” (“SFAS No.123"123”), we account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,"Accounting“Accounting for Stock Issued toEmployees" ("Employees” (“APB No.25"25”). We have adopted the disclosure-only provisions of SFAS No. 123 and continue to apply APB No. 25 and related interpretations in accounting for the stock option plans and the employee stock purchase plan.In December 2002, the Financial Accounting Standards Board
("FASB"(“FASB”) issued Statement of Financial Accounting Standards No. 148,"Accounting“Accounting for Stock-BasedCompensation -Compensation–Transition andDisclosure" ("Disclosure” (“SFAS No.148"148”). This statement amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 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.This statement is effective for fiscal years ending after December 15, 2002. The adoption of the disclosure requirements of this statement, on February 1, 2003, did not have a material effect on the Company's financial position, results of operations or cash flows.The disclosures required by SFAS No. 148 are included below.31Had we elected to apply the accounting standards of SFAS No. 123, as amended by SFAS No. 148, our net earnings and net earnings per share would have been approximately the pro forma amounts indicated below (in thousands, except per share data):
FISCAL YEAR -------------------------------------- 2001 2002 2003 ---------- ---------- ----------Net earnings, as reported ................................ $ 43,276 $ 42,412 $ 50,026 Deduct: Additional compensation expense, net of tax ..... (3,129) (2,977) (2,460) ---------- ---------- ---------- Pro forma net earnings ................................... $ 40,147 $ 39,435 $ 47,566 ========== ========== ========== Net earnings per share: As reported: Basic .................................................. $ 1.06 $ 1.04 $ 1.29 Diluted ................................................ $ 1.04 $ 1.04 $ 1.27 Pro forma: Basic .................................................. $ 0.98 $ 0.97 $ 1.23 Diluted ................................................ $ 0.97 $ 0.96 $ 1.21
Fiscal Year 2002 2003 2004 Net earnings, as reported $ 42,355 $ 49,734 $ 71,356 Add: Stock-based compensation, net of tax included in reported net earnings — — 77 Deduct: Stock-based compensation, net of tax determined under fair-value based method (2,977 ) (2,460 ) (3,017 ) Pro forma net earnings $ 39,378 $ 47,274 $ 68,416 Net earnings per share: As reported: Basic $ 1.04 $ 1.28 $ 1.98 Diluted $ 1.04 $ 1.27 $ 1.94 Pro forma: Basic $ 0.97 $ 1.22 $ 1.90 Diluted $ 0.96 $ 1.20 $ 1.86 34
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
For purposes of computing pro forma net earnings, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model, which resulted in a weighted-average fair value of
$11.47,$11.70, $9.99 and$9.99$15.82 for grants made during fiscal2001,2002, 2003 and2003,2004, respectively. The following weighted average assumptions were used for option grantsin fiscal 2001, 2002 and 2003, respectively: expected volatility of 54.01%, 54.14% and 54.75%, risk-free interest rates (U.S. Treasury five year notes) of 4.57%, 4.29% and 3.14%, and an expected life of six years.for each respective period:
Fiscal Year 2002 2003 2004 Risk-free interest rates 4.29 % 3.14 % 3.55 % Expected lives 6 years 6 years 6 years Dividend yield 0 % 0 % 0 % Expected volatility 54.14 % 54.75 % 50.93 % The effects of applying SFAS No. 123 in this pro forma disclosure may not be indicative of pro forma future amounts. See Note 6 for additional disclosures regarding stock-based compensation.
Refer to “Recently Issued Accounting Pronouncements” below for a discussion of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”).
Derivative Financial Instruments
--— We enter into foreign currency forward exchange contracts to hedge against foreign exchange risks associated with certain firmly committed, and certain other probable, but not firmly committed, inventory purchase transactions that are denominated in a foreign currency (primarily the Euro). Gains and losses associated with these contracts are accounted for as part of the underlying inventory purchase transactions. Thesecontactscontracts have been accounted for in accordance with Statement of Financial Accounting Standards No. 133"Accounting“Accounting for Derivative Instruments and HedgingActivities" ("Activities” (“SFAS No.133"133”), asamended, which we adopted on February 4, 2001. In accordance with the transition provisions of SFAS No. 133, we recorded a cumulative loss adjustment of $0.5 million ($0.3 million, net of tax) in accumulated other comprehensive loss related primarily to the unrealized losses on foreign currency exchange contracts, which were designated as cash-flow hedging instruments.amended. The disclosures required by SFAS No. 133 are included in Note 8.In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities ("SFAS No. 149"). SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. Our adoption of this statement as of June 30, 2003 did not have a material impact on our financial position, results of operations or cash flows.In connection with our share repurchase programs, as described in Note 6, we from time to time issued put option contracts and received premiums for doing so, with the premiums being added to our capital in excess of par. Under these contracts, the contract counterparties had the option to require us to purchase a specific number of shares of our common stock at specific strike prices per share on specific dates. See Note 6 for additional disclosures regarding our put option contracts.
Foreign Currency Translation
--— Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at the exchange rates in effect at each balance sheet date.Shareholders'Shareholders’ equity is translated at applicable historical exchange rates. Income, expense and cash flow items are translated at average exchange rates during the year. Resulting translation adjustments are reported as a separate component ofshareholders'shareholders’ equity.32Comprehensive Income
--— Comprehensive income includes all changes in equity during the period presented that result from transactions and other economic events other than transactions with shareholders.Segment Information
--— We consider our business as one operating segment based on the similar economic characteristics of our three brands. Revenues of Canadian retail operations were$144.6 million,$141.9 million, $154.7 million and$154.7$174.9 million for fiscal2001,2002, 2003 and2003,2004, respectively. Long-lived assets of our Canadian operations were$35.2$44.3 million and$45.5$63.1 million as of the end of fiscal20022003 and2003,2004, respectively.Accounting for
Guarantees --the Effect of Contingently Convertible Debt on Diluted Earnings per Share —InNovember 2002, the FASB issued Financial Interpretation No. 45 ("FIN No. 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN No. 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 No. 45 is effective for guarantees issued or modified after December 31, 2002. As of January 31,September 2004,we did not have any material guarantees that were issued or modified after December 31, 2002. The disclosure requirements of FIN No. 45 are effective for interim and annual periods ending after December 15, 2002 and are applicable to guarantees issued before December 31, 2002. We did not have any significant guarantees issued before December 31, 2002. Vendor Allowances -- In November 2002,the Emerging Issues Task Force("EITF"(“EITF”)issuedof the FASB reached a consensus on Issue02-16, "AccountingNo. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share” (“EITF 04-8”), and the FASB ratified the consensus in October 2004. The EITF’s consensus states that shares of common stock contingently issuable pursuant to contingent convertible debt instruments should be included in diluted earnings per share computations, if dilutive, regardless of whether the contingent feature has been met. EITF 04-8 is effective for fiscal years ending after December 15, 2004 and must be applied retroactively. Our $130.0 million 3.125% Convertible Senior Notes due 2023 (“Notes”) are contingently convertible into shares of common stock initially at a conversion rate of 23.318735
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
shares of common stock per $1,000 principal amount of Notes and may, at our option, be settled in cash or a combination of cash and common stock. However, on January 28, 2005, we entered into a supplemental indenture relating to the Notes and irrevocably elected to settle the principal amount at issuance of such Notes in 100% cash when they become convertible and are surrendered by
a Customer (Including a Reseller) for Cash Consideration Received from a Vendor." This EITF addressestheaccounting treatment for cash vendor allowances received. Theholders thereof. Due to this election, the adoption of EITFIssue 02-16 in 2003 did not have a material impact on the Company's financial position, results of operations or cash flows. Reporting Gains and Losses from the Early Extinguishment of Debt -- We adopted Statement No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145") on February 2, 2003. SFAS No. 145 rescinds FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," FASB Statement No. 44, "Accounting for Intangible Assets of Motor Carriers" and FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". In addition, SFAS No. 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 statement04-8 did not have a material impact on our financial position, results of operations or cash flows. See Note 3 for further information regarding the Notes.Recently Issued Accounting
for Asset Retirement Obligations -- We adoptedPronouncements —In November 2004, the FASB issued Statement of Financial Accounting Standards No.143, "Accounting for Asset Retirement Obligations" ("151, “Inventory Costs — an Amendment of Accounting Research Bulletin (“ARB”) No. 43, Chapter 4” (“SFAS No.143"151”), on February 2, 2003.. SFAS No.143 addresses151 amends ARB No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current period charges. It also requires that allocation of fixed production overheads to theaccounting and reporting for obligations associated withcosts of conversion be based on theretirementnormal capacity oftangible long-lived assets andtheassociated retirement costs. The adoption of this statement did not have a material impact on our financial position, results of operations or cash flows. Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity -- We adopted Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("production facilities. SFAS No.150") as of August 3, 2003. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments, many of which were previously classified as equity. This statement151 is effective forfinancial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim periodfiscal years beginning after June 15,2003. The adoption of this statement did not have a material impact on our financial position, results of operations or cash flows. Recently Issued Accounting Pronouncements -- In December 2003, the FASB issued a revised interpretation of FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (revised December 2003)" ("FIN 46R"). FIN 46R 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 46R is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46R must be applied no later than December 31, 2003 for entities meeting the definition of special - purpose entities, and no later than fiscal periods ending after March 15, 2004 for all other entities under construction. As we2005. We do nothave any variable interest entities,expect the adoption ofFIN 46R is not expectedSFAS No. 151 to have a material impact on our financial position, results of operations or cash flows.33In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. This Statement establishes the fair value method for measurement and requires all entities to apply this fair value method in accounting for share-based payment transactions. The amount of compensation cost will be measured based on the grant-date fair value of the instrument issued and will be recognized over the vesting period. SFAS No. 123R replaces SFAS 123 and supersedes APB No. 25. The provisions of SFAS No. 123R are effective for the first fiscal year beginning after June 15, 2005 for all awards granted or modified after that date and for those awards granted prior to that date that have not vested.
SFAS No. 123R requires companies to assess the most appropriate model to calculate the value of the options. In addition, there are a number of other requirements under the new standard that will result in differing accounting treatment than currently required. These differences include, but are not limited to, the accounting for the tax benefit on employee stock options and for stock issued under our employee stock purchase plan. In addition to the appropriate fair value model to be used for valuing share-based payments, we will also be required to determine the transition method to be used at date of adoption. The allowed transition methods include modified prospective and modified retroactive adoption options. Under the modified retroactive options, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The modified prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS No. 123R, while the modified retroactive method would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. We plan to adopt SFAS No. 123R at the beginning of fiscal 2006 using the modified prospective method.
Upon adoption, SFAS No. 123R will have a significant impact on our consolidated financial statements as we will be required to expense the fair value of our stock option grants and stock purchases under our employee stock purchase plan rather than disclose the impact on our consolidated net earnings and net earnings per share within our footnotes, as is our current practice in accordance with SFAS No. 123. The impact of adoption of SFAS No. 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123R in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net earnings and pro forma net earnings per share elsewhere in this Note 1.
2. EARNINGS PER SHARE
Basic 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, as well as the potential dilution that could occur if our contingent convertible debt or other contracts to issue common stock were converted or exercised. No dilution from the contingent convertible debt or other contracts has occurred.
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THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table reconciles the earnings and shares used in the basic and diluted EPS computations (in thousands, except per share amounts):
FISCAL YEAR --------------------------- 2001 2002 2003 ------- ------- -------Net earnings ........................ $43,276 $42,412 $50,026 ======= ======= ======= Weighted average number of common shares outstanding ........ 40,997 40,590 38,789 ======= ======= ======= Basic earnings per share ............ $ 1.06 $ 1.04 $ 1.29 ======= ======= ======= Weighted average number of common shares outstanding ........ 40,997 40,590 38,789 Assumed exercise of stock options ... 449 287 506 ------- ------- ------- As adjusted ......................... 41,446 40,877 39,295 ======= ======= ======= Diluted earnings per share .......... $ 1.04 $ 1.04 $ 1.27 ======= ======= =======
Fiscal Year 2002 2003 2004 Net earnings $ 42,355 $ 49,734 $ 71,356 Weighted average number of common shares outstanding 40,590 38,789 36,029 Basic earnings per share $ 1.04 $ 1.28 $ 1.98 Weighted average number of common shares outstanding 40,590 38,789 36,029 Assumed exercise of stock options 287 506 784 As adjusted 40,877 39,295 36,813 Diluted earnings per share $ 1.04 $ 1.27 $ 1.94 3. LONG-TERM DEBT
In January 2003, we replaced
ouran 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"“Credit Agreement”) that provides for borrowing of up to $100.0 million through February 4,2006 (with extensions for up2006. In July 2004, we amended the Credit Agreement totwo years under certain conditions).extend the maturity date to July 7, 2009. The Credit Agreement is secured by substantially all of the stock of the subsidiaries of TheMen'sMen’s Wearhouse, Inc. Advances under the Credit Agreement bear interest at a rate per annum equal to, at our option, theagent'sagent’s prime rate or the reserve adjusted LIBOR rate plus a varying interest rate margin up to 2.25%. The Credit Agreement also provides for fees applicable to unused commitments ranging from 0.275% to 0.500%.The terms and conditions of the new Credit Agreement are substantially the same as those of the replaced facility. In addition, in January 2003, we entered into a new Canadian term credit agreement under which we borrowed Can $62.0 million (US $40.7 million) which was used to repay approximately Can $60.9 million (US $40.0 million) in outstanding indebtedness of Moores under the previous term credit agreement. On October 31, 2003, we repaid the outstanding indebtedness of Can $60.5 million (US $45.9 million).As of January31, 2004,29, 2005, there were no borrowings outstanding under the Credit Agreement.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
arewere in compliance with the covenants in the Credit Agreement as of January31, 2004.29, 2005.On October 21, 2003, we issued $130.0 million of 3.125%
Convertible SeniorNotesdue 2023 ("Notes")in a private placement. A portion of the net proceeds from the Notes was used to repaytheoutstanding indebtednessunder our Canadian term credit agreementand to repurchase shares of our common stock under the program authorized by the Board in September2003;2003 (see below); the balance is reserved for general corporate purposes, which may include additional purchases of our common stock under our share repurchase program. Interest on the Notes is payable semi-annually on April 15 and October 15 of each year, beginning on April 15, 2004. The Notes will mature on October 15, 2023. However, holders may require us to purchase all or part of the Notes, for cash, at a purchase price of 100% of the principal amount per Note plus accrued and unpaid interest on October 15, 2008, October 15, 2013 and October 15, 2018 or upon a designated event. Beginning on October 15, 2008, we will pay additional contingent interest on the Notes if the average trading price of the Notes is above a specified level during a specified period. In addition, we may redeem all or a portion of the Notes on or after October 20, 2008, at 100% of the principal amount of the Notes plus any accrued and unpaid interest, contingent interest and additional34amounts, if any. We also have the right to redeem the Notes between October 20, 2006 and October 19, 2008 if the price of our common stock reaches certain levels. During certain periods, the Notes are convertible by holders into shares of our common stock initially at a conversion rate of 23.3187 shares of common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of $42.88 per share of common stock (subject to adjustment in certain events), under the following circumstances: (1) if the closing sale price of our common stock issuable upon conversion exceeds 120% of the conversion price under specified conditions; (2) if we call the Notes for redemption; or (3) upon the
37
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
occurrence of specified corporate transactions. Upon conversion of the Notes, in lieu of delivering common stock we may, at our election, deliver cash or a combination of cash and common stock. However, on January 28, 2005, we entered into a supplemental indenture relating to the Notes and irrevocably elected to settle the principal amount at issuance of such Notes in 100% cash when they become convertible and are surrendered by the holders thereof. The Notes are general senior unsecured obligations, ranking on
aparity in right of payment with all our existing and future unsecured senior indebtedness and our other general unsecured obligations, and senior in right of payment with all our future subordinated indebtedness. The Notes are effectively subordinated to all of our senior secured indebtedness and all indebtedness and liabilities of our subsidiaries.In December 2003, we acquired the assets and operating leases for 13 retail dry cleaning and laundry facilities and issued a note payable for $1.0 million
note payableas partial consideration. The unsecured note payable,is duewith interest at 4%, was paid in full in2008 and interest compounds annually at 4.0%.January 2005.We utilize letters of credit primarily
forto secure inventory purchases. At January31, 2004,29, 2005, letters of credit totaling approximately$17.3$14.5 million were issued and outstanding.The fair value of the Notes, using quoted market prices of the same or similar issues, was approximately $127.1 and $134.7 million at January 31,
2004.2004 and January 29, 2005, respectively. The carrying amounts of all other long-term debt approximate fair value atFebruary 1, 2003January 31, 2004 and January31, 2004.29, 2005.4. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
FISCAL YEAR ------------------------------ 2001 2002 2003 -------- -------- --------Current tax expense: Federal ........................... $ 14,607 $ 10,248 $ 17,889 State ............................. 1,715 1,010 1,081 Foreign ........................... 8,022 6,976 10,236 Deferred tax expense (benefit): Federal and state ................. 3,088 5,695 3,107 Foreign ........................... 266 1,790 (2,602) -------- -------- -------- Total ..................... $ 27,698 $ 25,719 $ 29,711 ======== ======== ========
Fiscal Year 2002 2003 2004 Current tax expense: Federal $ 10,246 $ 17,889 $ 27,067 State 1,010 1,081 2,078 Foreign 6,960 10,226 7,992 Deferred tax expense (benefit): Federal and state 5,868 3,098 3,333 Foreign 1,600 (2,756 ) 1,889 Total $ 25,684 $ 29,538 $ 42,359 No provision for U.S. income taxes or Canadian withholding taxes has been made on the cumulative undistributed earnings of Moores (approximately
$96.2$112.0 million at January31, 2004) since such earnings are considered to be permanently invested in Canada.29, 2005). Thedetermination of any unrecognizedpotential deferred tax liability associated with these earnings is estimated to be $2 million.In December 2004, the FASB issued FSP No. FAS109-2, “Accounting and Disclosure Guidance for the
cumulative undistributedForeign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (AJCA)”. The AJCA provides a one-time 85% dividends received deduction for certain foreign earnings that are repatriated under a plan for reinvestment in the United States, provided certain criteria are met. FSP No. 109-2 is effective immediately and provides accounting and disclosure guidance for the repatriation provision. FSP No. 109-2 allows companies additional time to evaluate the effects ofMooresthe law on its unremitted earnings for the purpose of applying the “indefinite reversal criteria” under APB Opinion No. 23, “Accounting for Income Taxes – Special Areas”, and38
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
requires explanatory disclosures from companies that have not yet completed the evaluation. The Company is currently evaluating the effects of the repatriation provision and their impact on our consolidated financial statements. We do not
considered practicable since such liability,expect to complete this evaluation before the end of 2005. The range of possible amounts of unremitted earnings that may be repatriated under this provision, if any,will depend on a number of factors thatand the related potential income taxes cannot beknownreasonably estimated untilsuch time as a decision to repatriate the earnings might be made by management.this evaluation is complete.A reconciliation of the statutory federal income tax rate to our effective tax rate is as follows:
FISCAL YEAR ---------------- 2001 2002 2003 ---- ---- ----Federal statutory rate ...................... 35% 35% 35% State income taxes, net of federal benefit .. 2 1 2 Other ....................................... 2 2 - --- --- --- 39% 38% 37% === === ===At February 1, 2003, we had net deferred tax liabilities of $8.1 million with $12.7 million classified as other current assets and $20.8 million classified as other liabilities (noncurrent).
Fiscal Year 2002 2003 2004 Federal statutory rate 35.0 % 35.0 % 35.0 % State income taxes, net of federal benefit 1.3 2.3 1.7 Foreign and Other 1.4 — 0.6 37.7 % 37.3 % 37.3 % At January 31, 2004, we had net deferred tax liabilities of
$8.5$5.1 million with$14.4$14.5 million classified as other current assets and$22.9$19.6 million classified as other liabilities (noncurrent). At January 29, 2005, we had net deferred tax liabilities of $10.1 million with $16.2 million classified as other current assets and $26.3 million classified as other liabilities (noncurrent). Our state net operating loss of $1.3 million (pre-tax $34.0 million) and foreign tax credit carryforwards of $0.7 million expire in varying amounts annually from 2005 through20232024 andfrom 2004 through 2008,in 2014, respectively.A valuation 35allowance is recorded to reduce the carrying amount of deferred tax assets unless it is more likely than not that such assets will be realized. As of February 1, 2003 and January 31, 2004, no valuation allowance was considered necessary.Total deferred tax assets and liabilities and the related temporary differences as of
February 1, 2003January 31, 2004 and January31, 200429, 2005 were as follows (in thousands):
FEBRUARY 1, JANUARY 31, 2003 2004 -------- --------Deferred tax assets: Accrued rent and other expenses .............. $ 6,854 $ 8,857 Accrued compensation ......................... 1,932 2,016 Accrued inventory markdowns .................. 985 595 Deferred intercompany profits ................ 2,742 3,399 Unused state operating loss carryforwards .... 3,130 1,609 Unused foreign tax credits ................... 662 873 Other ........................................ 518 620 -------- -------- 16,823 17,969 -------- -------- Deferred tax liabilities: Capitalized inventory costs .................. (4,126) (3,483) Property and equipment ....................... (19,533) (20,520) Intangibles .................................. (1,225) (1,781) Deferred interest ............................ -- (674) -------- -------- (24,884) (26,458) -------- -------- Net deferred tax liabilities ................... $ (8,061) $ (8,489) ======== ========
January 31, January 29, 2004 2005 Deferred tax assets: Accrued rent and other expenses $ 9,028 $ 10,750 Accrued compensation 2,016 2,969 Accrued inventory markdowns 595 1,283 Deferred intercompany profits 3,399 3,212 Unused state operating loss carryforwards 1,609 1,294 Unused foreign tax credits 873 665 Other 620 178 18,140 20,351 Deferred tax liabilities: Capitalized inventory costs (3,483 ) (4,044 ) Property and equipment (17,289 ) (20,751 ) Intangibles (1,781 ) (2,499 ) Deferred interest (674 ) (3,182 ) (23,227 ) (30,476 ) Net deferred tax liabilities $ (5,087 ) $ (10,125 ) 39
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
5. OTHER ASSETS AND ACCRUED EXPENSES
Other assets consist of the following (in thousands):
FEBRUARY 1, JANUARY 31, 2003 2004 -------- --------Trademarks, tradenames and other intangibles .............. $ 7,958 $ 9,475 Accumulated amortization .................................. (1,771) (2,450) -------- -------- 6,187 7,025 Tuxedo rental assets, deposits and other .................. 21,757 33,363 -------- -------- Total ........................................... $ 27,944 $ 40,388 ======== ======== Accrued expenses consist of the following (in thousands): Sales, payroll and property taxes payable ................. $ 8,874 $ 10,725 Accrued salary, bonus and vacation ........................ 17,779 24,041 Accrued workers compensation and medical costs ............ 5,419 8,919 Unredeemed gif certificates ............................... 10,624 13,096 Deferred gain on sale of assets ........................... 4,423 -- Other ..................................................... 8,204 14,351 -------- -------- Total ........................................... $ 55,323 $ 71,132 ======== ========36
January 31, January 29, 2004 2005 Trademarks, tradenames and other intangibles $ 9,475 $ 9,733 Accumulated amortization (2,450 ) (3,307 ) 7,025 6,426 Tuxedo rental assets, deposits and other 33,363 44,007 Total $ 40,388 $ 50,433 Accrued expenses consist of the following (in thousands): Accrued salary, bonus and vacation $ 24,041 $ 27,967 Sales, payroll and property taxes payable 10,725 11,826 Unredeemed gift certificates 13,096 16,062 Accrued workers compensation and medical costs 8,919 8,252 Other 14,351 18,816 Total $ 71,132 $ 82,923 6. CAPITAL STOCK, STOCK OPTIONS AND BENEFIT PLANS
In January 2000, the Board of Directors authorized the repurchase of up to one million shares of our common stock in the open market or in private transactions. On January 31, 2001, the Board authorized an expansion of the program for up to an additional two million shares. On November 19, 2002, the Board of Directors authorized a new stock repurchase program for up to $25.0 million in shares of our common stock. Under the first three authorized programs, we repurchased
1,185,000,1,480,000 and 1,057,100 shares of our common stock during fiscal2001,2002 and 2003, respectively, at a cost of$30.4 million,$28.1 million and $24.1 million, respectively. The average price per share of our common stock repurchased under these programs was$25.66,$18.96 and $22.80 during fiscal2001,2002 and 2003, respectively.In September 2003, the Board of Directors authorized a program for the repurchase of up to $100.0 million of our common stock in the open market or in private transactions. This authorization superceded the approximately
$1$1.0 million we had remaining under theBoard'sBoard’s November 2002 authorization. As of January 31, 2004, we had repurchased under this program 1,405,400 shares at a cost of $42.4 million in private transactions and 1,713,400 shares at a cost of $42.6 million in open market transactions. Under all authorized programs during fiscal 2003, we repurchased 4,175,900 shares of our common stock at a cost of $109.2 million, with an average repurchase price of $26.15 per share. As of January 29, 2005, we had repurchased under the September 2003 program 1,405,400 shares at a cost of $42.4 million in private transactions and 2,036,400 shares at a cost of $51.4 million in open market transactions, for a total of 3,441,800 shares at an average price per share of $27.25.In June 2004, the Board of Directors authorized a program for the repurchase of up to $50.0 million of our common stock in the open market or in private transactions. This authorization superceded the approximately $6.2 million we had remaining under the September 2003 authorization. As of January 29, 2005, a total of 99,400 shares at a cost of $2.5 million were repurchased in open market transactions under this program at an average price per share of $24.99.
40
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
During fiscal 2004, a total of 422,400 shares at a cost of $11.2 million were repurchased in open market transactions under all authorized stock repurchase programs at an average price per share of $26.48.
In connection with our share repurchase programs, we have from time to time issued put option contracts and received premiums for doing so, with the premiums being added to our capital in excess of par and effectively reducing the cost of our share repurchases. Under these contracts, the contract counterparties had the option to require us to purchase a specific number of shares of our common stock at a specific strike price per share on a specific date. During fiscal 2002, we issued a put contract for 500,000 shares and received a premium of $0.6 million for issuing this contract. The contract counterparty had the option to exercise this contract at a strike price of $22.76 per share on December 17, 2002, but contract completion was required earlier if the market price of our common stock fell below a trigger price of $12.64 per share. During the third quarter of 2002, the market price of our common stock fell below the trigger price and we settled the contract by repurchasing the 500,000 shares at $22.76 per share or $11.4 million; we recorded the shares purchased as treasury stock. We were not obligated to issue any shares under the put contract nor were we obligated to settle in cash.
We have adopted the 1992 Stock Option Plan
("(“1992Plan"Plan”) which, as amended, provides for the grant of options to purchase up to 1,071,507 shares of our common stock to full-time key employees (excluding certain officers),; the 1996 Long-Term Incentive Plan (formerly known as the 1996 Stock OptionPlan ("Plan) (“1996Plan"Plan”) which, as amended, provides forthe grantan aggregate ofoptions to purchaseup to 1,850,000 shares of our common stock with respect to which stock options, stock appreciation rights, restricted stock and performance based awards may be granted to full-time key employees (excluding certain officers), and; the 1998 Key Employee Stock Option Plan("(“1998Plan"Plan”) which, as amended, provides for the grant of options to purchase up to 2,100,000 shares of our common stock to full-time key employees (excluding certain officers).; and the 2004 Long-Term Incentive Plan which provides for an aggregate of up to 600,000 shares of our common stock with respect to which stock options, stock appreciation rights, restricted stock and performance based awards may be granted to full-time key employees. The 1992 Plan expired in February 2002 and each of the other plans will expire at the end of tenyears;years following the effective date of such plan; no option may be granted pursuant to the plans after the expiration date. In fiscal 1992, we also adopted a Non-Employee Director Stock Option Plan("(“DirectorPlan"Plan”) which, as amended, provides forthe grantan aggregate ofoptions to purchaseup to 167,500 shares of our common stock with respect to which stock options, stock appreciation rights or restricted stock awards may be granted to non-employee directors of the Company. In fiscal 2001, the DirectorPlan'sPlan’s termination date was extended to February 23, 2012. Options granted under these plans must be exercised within ten years of the date of grant.Generally, options granted
underpursuant to the1992 Plan, 1996 Plan and 1998 Planemployee plans vest at the rate of 1/3 of the shares covered by the grant on each of the first three anniversaries ofthe date of grant and may not be issued at a price less than 50% of the fair market value of our stock onthe date of grant. However, a significant portion of options granted under these Plans vest annually in varying increments over a period from one to ten years. Under the 1996 Plan and the 2004 Plan, options may not be issued at a price less than 100% of the fair market value of our stock on the date of grant. Under the 1996 Plan and the 2004 Plan, the vesting, transferability restrictions and other applicable provisions of any stock appreciation rights, restricted stock or performance based awards will be determined by the Compensation Committee of the Company’s board of directors. Options granted under the Director Plan vest one year after the date of grant and are issued at a price equal to the fair market value of our stock on the date of grant; provided, however, that the committee who administers the Director Plan may elect to grant stock appreciation rights, having such terms and conditions as the committee determines, in lieu of any option grant. Restricted stock awards granted under the Director Plan vest one year after the date of grant. On January 30, 2004, 4,000 restricted shares were granted to the outside directors at a grant price of $23.29 per share.The grant of theseDuring fiscal 2004, 8,000 restricted sharesis contingent upon shareholder approvalwere granted to the outside directors at an average price per share ofthe amendment and restatement of the Director Plan.$30.94.41
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table is a summary of our stock option activity:
37
WEIGHTED SHARES UNDER AVERAGE OPTIONS OPTION EXERCISE PRICE EXERCISABLE --------- -------------- -----------Options outstanding, February 3, 2001...................... 2,434,361 $ 20.76 1,262,993 ========= Granted.................................................. 498,490 $ 20.45 Exercised................................................ (79,479) $ 15.24 Forfeited................................................ (60,165) $ 23.54 --------- Options outstanding, February 2, 2002...................... 2,793,207 $ 20.80 1,594,171 ========= Granted.................................................. 500,800 $ 20.42 Exercised................................................ (165,105) $ 13.77 Forfeited................................................ (125,115) $ 21.66 --------- Options outstanding, February 1, 2003...................... 3,003,787 $ 21.09 1,797,834 ========= Granted.................................................. 608,125 $ 17.23 Exercised................................................ (421,441) $ 17.98 Forfeited................................................ (75,533) $ 20.73 --------- Options outstanding, January 31, 2004...................... 3,114,938 $ 20.76 1,444,494 ========= =========
Weighted Shares Under Average Options Option Exercise Price Exercisable Options outstanding, February 2, 2002 2,793,207 $ 20.80 1,594,171 Granted 500,800 $ 20.42 Exercised (165,105 ) $ 13.77 Forfeited (125,115 ) $ 21.66 Options outstanding, February 1, 2003 3,003,787 $ 21.09 1,797,834 Granted 608,125 $ 17.23 Exercised (421,441 ) $ 17.98 Forfeited (75,533 ) $ 20.73 Options outstanding, January 31, 2004 3,114,938 $ 20.76 1,444,494 Granted 245,000 $ 29.28 Exercised (489,561 ) $ 19.93 Forfeited (115,189 ) $ 18.44 Options outstanding, January 29, 2005 2,755,188 $ 21.76 1,347,475 Grants of stock options outstanding as of January
31, 200429, 2005 are summarized as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------- ---------------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE --------------- ----------- ----------- --------- ----------- -------$ 9.89 to 18.00.............. 945,860 5.8 Years $ 14.56 471,985 $15.25 18.00 to 21.50.............. 966,522 6.6 Years 21.19 318,308 21.31 21.50 to 24.00.............. 830,040 7.1 Years 23.19 349,262 23.55 24.00 to 50.00.............. 372,516 5.3 Years 29.96 304,939 30.96 --------- --------- $ 9.89 to 50.00.............. 3,114,938 $ 20.76 1,444,494 $21.91 ========= =========
Options Outstanding Options Exercisable Weighted- Average Weighted- Weighted- Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price $ 11.90 to 18.00 687,070 4.9 Years $ 14.22 379,819 $ 15.57 18.00 to 21.50 795,104 5.7 Years 21.24 352,218 21.19 21.50 to 24.00 783,837 6.6 Years 23.21 338,776 23.44 24.00 to 50.00 489,177 6.2 Years 30.87 276,662 31.17 $ 11.90 to 50.00 2,755,188 5.8 Years $ 21.76 1,347,475 $ 22.22 As of January
31, 2004, 741,11329, 2005, 1,184,452 options were available for grant under existing plans and3,860,0513,393,235 shares of common stock were reserved for future issuance.The difference between the option price and the fair market value of our common stock on the dates that options for
79,479,165,105, 421,441 and421,441489,561 shares of common stock were exercised during fiscal2001,2002, 2003 and2003,2004, respectively, resulted in a tax benefit to us of$0.3 million,$0.6 million, $1.6 million and$1.6$1.8 million, respectively, which has been recognized as capital in excess of par.We have a profit sharing plan, in the form of an employee stock plan, which covers all eligible employees, and an employee tax-deferred savings plan. Contributions to the profit sharing plan are made at the discretion of the Board of Directors. During fiscal
2001,2002, 2003 and2003,2004, contributions charged to operations were$0.4 million,$0.8 million, $1.7 million and$1.7$2.2 million, respectively, for the plans.38In 1998, we adopted an Employee Stock Discount Plan
("ESDP"(“ESDP”) which allows employees to authorize after-tax payroll deductions to be used for the purchase of up to 1,425,000 shares of our common stock at 85% of the lesser of the fair market value on the first day of the offering period or the fair market value on the last day of the offering period. We make no contributions to this plan but pay all brokerage, service and other costs incurred. Effective for offering periods beginning July 1, 2002, the plan was amended so that a participant may not purchase more than 125 shares during any calendar quarter. During fiscal2001,2002, 2003 and2003,2004, employees purchased56,617,51,359, 48,195 and48,19542
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
49,211 shares, respectively, under the ESDP, the weighted-average fair value of which was
$16.63,$14.82, $15.41 and$15.41$22.77 per share, respectively. As of January31, 2004, 1,155,04729, 2005, 1,105,836 shares were reserved for future issuance under the ESDP.7. GOODWILL AND OTHER INTANGIBLE ASSETS
We adopted SFAS No. 142, "Goodwill and Other Intangible Assets," on February 3, 2002. In accordance with SFAS No. 142, we discontinued the amortization of goodwill effective February 3, 2002. Additionally, SFAS No. 142 subjects goodwill to fair-value based impairment tests performed, at a minimum, on an annual basis, or more frequently if circumstances dictate. We completed the annual impairment test of goodwill during the fourth quarter of 2003. No impairment charges were recorded. Had we applied SFAS No. 142 during fiscal 2001, our net earnings and net earnings per share would have approximated the pro forma amounts indicated below (in thousands, except per share amounts):
Net earnings, as reported.......................... $ 43,276 Add back: Goodwill amortization, net of tax............. 1,708 --------- Pro forma net earnings............................. $ 44,984 ========= Earnings per share: Basic: Net earnings, as reported................. $ 1.06 Goodwill amortization, net of tax......... 0.04 --------- Pro forma net earnings.................... $ 1.10 ========= Diluted: Net earnings, as reported................. $ 1.04 Goodwill amortization, net of tax......... 0.04 --------- Pro forma net earnings.................... $ 1.08 =========Changes in the net carrying amount of goodwill for the years ended
February 1, 2003January 31, 2004 and January31, 200429, 2005 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 Goodwill of acquired business.......................... 4,550 Translation adjustment................................. 2,710 ---------- Balance, January 31, 2004.................................. $ 43,867 ==========39
Balance, February 1, 2003 $ 36,607 Goodwill of acquired business 4,550 Translation adjustment 2,710 Balance, January 31, 2004 43,867 Goodwill of acquired business 10,538 Translation adjustment 1,419 Balance, January 29, 2005 $ 55,824 In December 2003, we acquired the assets and operating leases for 13 retail dry cleaning and laundry facilities operating in the Houston, Texas area. We acquired an additional 11 facilities in September 2004.
The gross carrying
amountsamount and accumulated amortization of our other intangibles, which are included in other assets in the accompanying balance sheet, are as follows (in thousands):
FEBRUARY 1, JANUARY 31, 2003 2004 ----------- -----------Trademarks, tradenames and other intangibles................ $ 7,958 $ 9,475 Accumulated amortization.................................... (1,771) (2,450) ----------- ----------- Net total.............................................. $ 6,187 $ 7,025 =========== ===========
January 31, January 29, 2004 2005 Trademarks, tradenames and other intangibles $ 9,475 $ 9,733 Accumulated amortization (2,450 ) (3,307 ) Net total $ 7,025 $ 6,426 The pretax amortization expense associated with intangible assets totaled approximately
$346,000,$428,000, $737,000 and$737,000$857,000 for fiscal2001,2002, 2003 and2003,2004, respectively. Pretax amortization expense associated with intangible assets at January31, 200429, 2005 is estimated to be approximately$836,000$886,000 foreach ofthe fiscalyears 2004 andyear 2005,$785,000$832,000 for fiscal year 2006,and $623,000$674,000 for each of the fiscal years 2007 and2008.2008 and $658,000 for fiscal year 2009.8. 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 practices include entering into foreign currency forward exchange contracts to minimize foreign currency exposure related to forecasted purchases of certain inventories. Under SFAS No. 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 January 29, 2005, we had 24 contracts maturing in varying increments to purchase an aggregate notional amount of $9.0 million in foreign currency, maturing at various dates through December 2005. At January 31, 2004, we had 23 contracts maturing in varying increments to purchase an aggregate notional amount of $15.4 million in foreign currency, maturing at various dates through January 2005. During fiscal
20022003 and2003,2004, we recognized an insignificant amount of hedge ineffectiveness.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 year-end. We expect to recognize in earnings through January
29, 200528, 2006 approximately$0.7$0.4 million, net of tax, of existing net gains presently deferred in accumulated other comprehensive income.43
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
9. RELATED PARTY TRANSACTIONS
On August 16, 2004, we purchased a store (land and building, which we had been leasing) in Dallas, Texas for $1.0 million from 8239 Preston Road, Inc., a Texas corporation of which George Zimmer, Chairman of the Board and CEO of the Company, James E. Zimmer, Senior Vice President-Merchandising of the Company, and Richard Goldman, a former officer and director of the Company, each owned 20% of the outstanding common stock, and Laurie Zimmer, sister of George and James E. Zimmer, owned 40% of the outstanding common stock.
On August 20, 2004, we purchased a 1980 Gulfstream III aircraft from Regal Aviation L.L.C. (“Regal Aviation”) for $5.0 million. Regal Aviation operates a private air charter service and is a limited liability company of which George Zimmer owns 99%. In addition, on August 20, 2004, we entered into a leasing arrangement with Regal Aviation under which Regal Aviation will operate, manage and market the aircraft as well as provide the appropriate flight personnel and services. The aircraft will be utilized to provide air transportation from time to time for employees of the Company as well as be leased to third parties for charter.
On October 15, 2004, we purchased a warehouse facility located in Houston, Texas (the “Facility”) from Zig Zag for $0.7 million. Zig Zag is a Texas joint venture, in which Richard E. Goldman, George Zimmer and James E. Zimmer were the sole and equal joint venturers. Prior to the purchase of the Facility, we leased the Facility from Zig Zag.
10. COMMITMENTS AND CONTINGENCIES
Lease commitments
We lease retail business locations, office and warehouse facilities, copier equipment and automotive equipment under various noncancelable capital and operating leases expiring in various years through
2028.2027. Rent expense for operating leases for fiscal2001,2002, 2003 and20032004 was$78.3 million,$86.0 million, $90.0 million and$90.0$95.7 million, respectively, and includes contingent rentals of$0.3 million,$0.8 million, $0.6 million and$0.6$0.8 million, respectively. Minimum future rental payments under noncancelable capital and operating leases as of January31, 200429, 2005 for each of the next five years and in the aggregate are as follows (in thousands):40
FISCAL YEAR AMOUNT - ------------------------------------- ---------2004................................. $ 91,839 2005................................. 83,178 2006................................. 69,542 2007................................. 58,966 2008................................. 48,211 Thereafter........................... 102,655 --------- Total............................ $ 454,391 =========
Operating Capital Fiscal Year Leases Leases 2005 $ 95,417 $ 717 2006 82,690 534 2007 72,358 412 2008 61,213 275 2009 48,815 122 Thereafter 100,526 368 Total $ 461,019 2,428 Amounts representing interest (761 ) Capital lease obligations $ 1,667 Leases on retail business locations specify minimum rentals plus common area maintenance charges and possible additional rentals based upon percentages of sales. Most of the retail business location leases provide for renewal options at rates specified in the leases. In the normal course of business, these leases are generally renewed or replaced by other leases.
At January 29, 2005, the gross capitalized balance and the accumulated depreciation balance of our capital lease assets was $3.6 million and $2.2 million, respectively, resulting in a net capitalized value of $1.4 million. These assets are included in furniture, fixtures and equipment on the balance sheet. The deferred liability balance of these capital lease assets is included in deferred taxes and other liabilities on the balance sheet.
44
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Legal matters
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“Orange CountySuit"). 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"Suit”). The Orange County Suit was brought as a purported classaction. The Los Angeles County Suit was brought as a multi-party action. The Suits allegeaction and alleges several causes of action, each based on the factual allegation that in the State of California the Companyand K&Gmisclassified its managers and assistant managers as exempt from the application of certain California labor statutes. Because of this alleged misclassification, theSuits allegeOrange County Suit alleges that the Companyand K&Gfailed to pay overtime compensation and provide the required rest periods to such employees. TheSuits seek,Orange County Suit seeks, 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.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. As a result of recent mediations, we recognized a charge in the fourth quarter of 2003 for $3.7 million ($2.3 million, net of tax) which we believe to be a reasonable estimate of the incremental costs we expect to incur in connection with the proposed resolution of the Suits and the Tailor's Suit.We believe that theSuits and the Tailor'sOrange County Suit will be resolved in2004;2005; however, no assurance can be given that the anticipated resolution will be realized. We do not believe the ultimate resolution of theSuits or the Tailor'sOrange County Suit will have a material adverse effect on our financial position, results of operations or cash flows.On April 1, 2004, a lawsuit was filed against the Company in the Superior Court of California for the County of Los Angeles, Case No. BC313038 (the
"PII Suit"“PII Suit”). The PII Suit, which was brought as a purported class action, alleges two causes of action, each based on the factual allegation that the Company requests or requires, in conjunction with acustomer'scustomer’s use of his or her credit card, the customer to provide personal identification information which is recorded upon the credit card transaction form. The PII Suit seeks: (i) civil penalties pursuant to the California Civil Code; (ii) an order enjoining the Company from requesting or requiring that a customer provide personal identification information which is then recorded on the transaction form; (iii) permanent and preliminary injunctions against the Company requesting or requiring that a customer provide personal identification information which is then recorded on the transaction form; (iv) restitution of all funds allegedly acquired by means of any act or practice declared by the Court to be unlawful or fraudulent or to constitute a violation of the California Business and Professions Code; (v)attorney'sattorney’s fees; and (vi) costs of suit. The court has not yet decided whether the action may proceed as a class action. TheCompany intends to vigorously defendCourt has determined that thePII Suit.claim for restitution may not proceed. We have reached a tentative settlement; however, no assurance can be given that the court will approve the settlement or that the anticipated resolution will be realized. We do not believe the ultimate resolution of the PII Suit will have a material adverse effect on our financial position, results of operations or cash flows.41In 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,position, results of operations or cash flows.10.11. SUBSEQUENT EVENT
On March 4, 2005, we entered into a Succession Agreement with Eric J. Lane, former President and Chief Operating Officer and current Executive Vice President of the Company. Eric J. Lane, voluntarily and at his request, stepped down as President and Chief Operating Officer effective February 1, 2005 and will serve as an Executive Vice President of the Company through July 31, 2005.
On March 8, 2005, we committed to a course of action in connection with the termination of operations in our R&D retail concept “Eddie Rodriguez”. We have determined that there will be no further investments made in Eddie Rodriguez and that the six stores operating as of January 29, 2005 will be wound down over the course of fiscal 2005.
45
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
12. QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED)(Unaudited)Our quarterly results of operations reflect all adjustments, consisting only of normal, recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The consolidated results of operations by quarter for the
20022003 and20032004 fiscal years are presented below (in thousands, except per share amounts):
FISCAL 2002 QUARTERS ENDED ----------------------------------------------- MAY 4, AUGUST 3, NOVEMBER 2, FEBRUARY 1, 2002 2002 2002 2003 -------- --------- ----------- -----------Net sales.............. $303,857 $ 308,574 $ 292,515 $ 390,103 Gross margin .......... 104,155 107,051 97,940 145,202 Net earnings .......... $ 10,458 $ 7,797 $ 4,285 $ 19,872 Net earnings per share: Basic .............. $ 0.25 $ 0.19 $ 0.11 $ 0.50 Diluted ............ $ 0.25 $ 0.19 $ 0.11 $ 0.50
FISCAL 2003 QUARTERS ENDED ----------------------------------------------- MAY 3, AUGUST 2, NOVEMBER 1, JANUARY 31, 2003 2003 2003 2004 -------- --------- ----------- -----------Net sales.............. $313,122 $ 334,292 $ 322,613 $ 422,653 Gross margin........... 111,219 122,936 118,438 161,350 Net earnings........... $ 11,012 $ 11,448 $ 9,055 $ 18,511 Net earnings per share: Basic............... $ 0.28 $ 0.29 $ 0.23 $ 0.50 Diluted ............ $ 0.28 $ 0.29 $ 0.23 $ 0.49
Fiscal 2003 Quarters Ended May 3, August 2, November 1, January 31, 2003 2003 2003 2004 (as restated- (as restated- (as restated- (as restated- note 13) note 13) note 13) note 13) Net sales $ 313,122 $ 334,292 $ 322,613 $ 422,653 Gross margin 111,091 122,807 118,321 161,227 Net earnings $ 10,936 $ 11,353 $ 8,840 $ 18,605 Net earnings per share: Basic $ 0.28 $ 0.29 $ 0.23 $ 0.50 Diluted $ 0.28 $ 0.29 $ 0.22 $ 0.49
Fiscal 2004 Quarters Ended May 1, July 31, October 30, January 29, 2004 2004 2004 2005 (as restated- (as restated- (as restated- note 13) note 13) note 13) Net sales $ 360,729 $ 369,480 $ 357,795 $ 458,675 Gross margin 137,810 145,456 139,356 180,382 Net earnings $ 15,055 $ 18,380 $ 12,878 $ 25,043 Net earnings per share: Basic $ 0.42 $ 0.51 $ 0.36 $ 0.69 Diluted $ 0.41 $ 0.50 $ 0.35 $ 0.67 As previously reported:
Fiscal 2003 Quarters Ended May 3, August 2, November 1, January 31, 2003 2003 2003 2004 Net sales $ 313,122 $ 334,292 $ 322,613 $ 422,653 Gross margin 111,219 122,936 118,438 161,350 Net earnings $ 11,012 $ 11,448 $ 9,055 $ 18,511 Net earnings per share: Basic $ 0.28 $ 0.29 $ 0.23 $ 0.50 Diluted $ 0.28 $ 0.29 $ 0.23 $ 0.49
Fiscal 2004
Quarters EndedMay 1, July 31, October 30, 2004 2004 2004 Net sales $ 360,729 $ 369,480 $ 357,795 Gross margin 137,872 145,444 139,365 Net earnings $ 15,096 $ 18,214 $ 12,574 Net earnings per share: Basic $ 0.42 $ 0.51 $ 0.35 Diluted $ 0.41 $ 0.50 $ 0.34 Due to the method of calculating weighted average common shares outstanding, the sum of the quarterly per share amounts may not equal earnings per share for the respective years.
42ITEM 9. CHANGES IN46
THE MEN’S WEARHOUSE, INC. AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTINGSUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
13. RESTATEMENT OF FINANCIAL STATEMENTS
Like many other companies in the retail and restaurant industries, we recently reviewed our accounting treatment for leases and depreciation of related leasehold improvements. Following our review, we determined to restate our prior financial statements for fiscal 2002 and 2003. Although we do not consider that these errors resulted in a material misstatement of our consolidated financial statements for any previously reported annual period, the aggregate effect of correcting the errors in the fourth quarter of fiscal 2004 would have had a material effect on our results of operations for that year.
Historically, when accounting for leases, we recorded rent expense on a straight-line basis over the initial non-cancelable lease term, with the term commencing generally when the store opened. We depreciated leasehold improvements on those properties over the lesser of the useful life of the asset or an average period, ranging from eight to 15 years for different leasehold groups, which represented the initial non-cancelable lease term plus periods of expected renewal. Landlord incentives received for reimbursement of leasehold improvements were netted against the amount recorded for the leasehold improvements.
We have conformed our lease terms used for recording straight-line rent and depreciation of leasehold improvements to include renewal option periods where the renewal appears reasonably assured. The lease terms commence when we take possession with the right to control use of the leased premises. We have also adopted a policy of capitalizing rent amounts allocated to the construction period for leased properties as leasehold improvements. Landlord incentives received for reimbursement of leasehold improvements are recorded as deferred rent and amortized as a reduction to rent expense over the term of the lease. We have restated our fiscal 2002 and 2003 consolidated financial statements for these lease accounting matters. We have also restated our quarterly financial results for fiscal 2003 and 2004 as shown in Note 12.
The restatement adjustments decreased net earnings by $0.1 million and $0.3 million in fiscal 2002 and 2003, respectively. The cumulative effect of these accounting changes is a reduction to retained earnings of $5.1 million as of the beginning of fiscal 2002. The restatement did not have any impact on our previously reported net cash flows or our sales or comparable store sales.
Fiscal Year 2003 As Previously (In thousands, except per share amounts) Reported Adjustment As Restated Consolidated Balance Sheet: Other current assets $ 30,858 $ 170 $ 31,028 Property and equipment, net 215,064 8,759 223,823 Total assets 869,198 8,929 878,127 Income taxes payable 26,096 (52 ) 26,044 Deferred taxes and other liabilities 31,682 14,649 46,331 Retained earnings 447,566 (5,492 ) 442,074 Accumulated other comprehensive income 10,533 (176 ) 10,357 Total shareholders’ equity 493,460 (5,668 ) 487,792 Consolidated Statement of Earnings: Cost of goods sold, including buying, distribution and occupancy costs $ 878,737 $ 497 $ 879,234 Gross margin 513,943 (497 ) 513,446 Selling, general and administrative expenses 431,695 (32 ) 431,663 Operating income 82,248 (465 ) 81,783 Earnings before income taxes 79,737 (465 ) 79,272 Provision for income taxes 29,711 (173 ) 29,538 Net earnings 50,026 (292 ) 49,734 Basic earnings per share (1) 1.29 (0.008 ) 1.28 Diluted earnings per share (1) 1.27 (0.007 ) 1.27 Consolidated Statement of Cash Flows: Cash provided by operating activities $ 118,767 $ 963 $ 119,730 Cash used in investing activities (54,844 ) (963 ) (55,807 ) 47
THE MEN’S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
DISCLOSURESTATEMENTS – (Continued)
Fiscal Year 2002 As Previously (In thousands, except per share amounts) Reported Adjustment As Restated Consolidated Statement of Earnings: Cost of goods sold, including buying, distribution and occupancy costs $ 840,701 $ 109 $ 840,810 Gross margin 454,348 (109 ) 454,239 Selling, general and administrative expenses 384,956 (17 ) 384,939 Operating income 69,392 (92 ) 69,300 Earnings before income taxes 68,131 (92 ) 68,039 Provision for income taxes 25,719 (35 ) 25,684 Net earnings 42,412 (57 ) 42,355 Basic earnings per share (1) 1.04 (0.001 ) 1.04 Diluted earnings per share (1) 1.04 (0.001 ) 1.04 Consolidated Statement of Cash Flows: Cash provided by operating activities $ 113,026 $ 1,958 $ 114,984 Cash used in investing activities (41,229 ) (1,958 ) (43,187 )
(1) Due to the effect of rounding, the sum of the per share amounts may not equal the effect of the adjustment. 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and Procedures
Our management, with the participation of the Chief Executive Officer
("CEO"(“CEO”) and Chief Financial Officer("CFO"(“CFO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the"Exchange Act"“Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, the CEO and CFO have concluded that, as of the end of such period, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports filed or submitted under the Exchange Act, within the time periods specified in theSEC'sSEC’s rules and forms.CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTINGInternal Control over Financial Reporting
Management’s Report on Internal Control Over Financial Reporting and the Attestation Report of the Registered Public Accounting Firm thereon appear on pages 25 and 26, respectively, of this Annual Report on Form 10-K. There were no changes in our internal control over financial reporting that occurred during the fourth quarter of fiscal
20032004 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Except as set forth below, the information required by this Item is incorporated herein by reference from our Proxy Statement for the Annual Meeting of Shareholders to be held June
30, 2004.29, 2005.The Company has adopted a Code of Ethics for Senior Management which applies to the
Company'sCompany’s Chief Executive Officer and all Presidents, Chief Financial Officers, Principal Accounting Officers, Executive Vice Presidents and other designated financial and operations officers. A copy of such policy isfiled as an Exhibit hereto.posted on the Company’s website,www.menswearhouse.com, under the heading “Corporate Governance”.ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference from our Proxy Statement for the Annual Meeting of Shareholders to be held June
30, 2004.29, 2005.49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain equity compensation plan information for the Company as of January 29, 2005.
Number of Weighted- Number of Securities Securities to be Average Remaining Available for Issued Upon Exercise Future Issuance Under Exercise of Price of Equity Compensation Outstanding Outstanding Plans (excluding Options Options securities in column (a)) Plan Category (a) (b) (c) Equity Compensation Plans Approved by Security Holders 1,424,526 21.49 1,047,328 Equity Compensation Plans Not Approved by Security Holders (1) 1,330,662 25.05 137,124 Total 2,755,188 21.76 1,184,452
(1) The Company has adopted the 1998 Key Employee Stock Option Plan (the “1998 Plan”) which, as amended, provides for the grant of options to purchase up to 2,100,000 shares of the Company’s common stock to full-time key employees (excluding executive officers), of which 1,245,458 shares are to be issued upon the exercise of outstanding options and 137,124 shares remain available for future issuance under the 1998 Plan. Options granted under the 1998 Plan must be exercised within ten years from the date of grant. Unless otherwise provided by the Stock Option Committee, options granted under the 1998 Plan vest at the rate of 1/3 of the shares covered by the grant on each of the first three anniversaries of the date of grant and may not be issued at a price less than 50% of the fair market value of our stock on the date of grant. However, a significant portion of options granted under these Plans vest annually in varying increments over a period from one to ten years. In connection with the merger with K&G Men’s Center, Inc. in June 1999, the Company granted substitute options to certain holders of options to purchase shares of common stock of K&G Men’s Center, Inc. who were not eligible to participate in the Company’s stock option plans at a weighted-average exercise price of $44.12. Of the 62,134 shares initially reserved for issuance pursuant to such options, options covering 18,704 shares remain unexercised at this time.
In connection with other acquisitions, the Company entered into employment or consulting arrangements with certain key individuals at the acquired companies and issued to them options to purchase 30,000 shares at an exercise price of $17.42, 22,500 shares at an exercise price of $24.25, and 32,000 shares at an exercise price of $15.98, of which 14,000 shares remain unexercised.
The additional information required by Item 12 is incorporated herein by reference from the Company’s Proxy Statement for its Annual Meeting of Shareholders to be held June 29, 2005.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference from our Proxy Statement for the Annual Meeting of Shareholders to be held June
30, 2004.29, 2005.ITEM
13. CERTAIN RELATIONSHIPS14. PRINCIPAL ACCOUNTANT FEES ANDRELATED TRANSACTIONSSERVICESThe information required by this Item is incorporated herein by reference from our Proxy Statement for the Annual Meeting of Shareholders to be held June
30, 2004. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item is incorporated herein by reference from our Proxy Statement for the Annual Meeting of Shareholders to be held June 30, 2004. 4329, 2005. 50
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K(a) 1.
FINANCIAL STATEMENTSFinancial StatementsThe following consolidated financial statements of the Company are included in Part II, Item
8.8:Management’s Report on Internal Control over Financial Reporting
Reports of Independent
Auditors' ReportRegistered Public Accounting FirmConsolidated Balance Sheets as of
February 1, 2003 andJanuary 31, 2004 (as restated-note 13) and January 29, 2005Consolidated Statements of Earnings for the years ended February
2, 2002, February1, 2003and(as restated-note 13), January 31, 2004 (as restated-note 13) and January 29, 2005Consolidated Statements of
Shareholders'Shareholders’ Equity and Comprehensive Income for the years ended February2, 2002, February1, 2003and(as restated-note 13), January 31, 2004 (as restated-note 13) and January 29, 2005Consolidated Statements of Cash Flows for the years ended February
2, 2002, February1, 2003and(as restated-note 13), January 31, 2004 (as restated-note 13) and January 29, 2005Notes to Consolidated Financial Statements
2.
FINANCIAL STATEMENT SCHEDULES SCHEDULEFinancial Statement SchedulesSchedule II
- VALUATION AND QUALIFYING ACCOUNTS THE MEN'S WEARHOUSE, INC. (IN THOUSANDS)– Valuation and Qualifying AccountsThe Men’s Wearhouse, Inc.
(In thousands)
Balance at Charged to Charged to Deductions Balance at Beginning Costs Other from Translation End of of Period and Expenses Accounts (4) Reserve (2) Adjustment Period Allowance for uncollectible accounts (1) : Year ended February 1, 2003 $ 322 $ 225 $ — $ (106 ) $ — $ 441 Year ended January 31, 2004 441 360 — (411 ) 3 393 Year ended January 29, 2005 393 300 — (289 ) 1 405 Allowance for sales returns (1) (3) : Year ended February 1, 2003 $ 325 $ — $ — $ — $ — $ 325 Year ended January 31, 2004 325 (53 ) 92 — — 364 Year ended January 29, 2005 364 (96 ) 158 — — 426 Inventory reserves (1) : Year ended February 1, 2003 $ 10,560 $ (3,551 ) $ — $ — $ 125 $ 7,134 Year ended January 31, 2004 7,134 (588 ) — — 311 6,857 Year ended January 29, 2005 6,857 48 — — 192 7,097
Balance at Charged to Charged to Deductions Balance at Beginning Costs and Other from Translation End of of Period Expenses Accounts (4) Reserve (2) Adjustment Period ---------- ---------- ------------ ----------- ----------- ----------Allowance(1) The allowance for uncollectible accounts, (1): Year ended February 2, 2002 $ 284 $ 197 $ - $ (159) $ - $ 322 Year ended February 1, 2003 322 225 - (106) - 441 Year ended January 31, 2004 441 360 - (411) 3 393the allowance for sales returns and the inventory reserves are evaluated at the end of each fiscal quarter and adjusted based on the evaluation.(2) Consists primarily of write-offs of bad debt. (3) Allowance for sales returns (1) (3): Year ended February 2, 2002 $ - $ (425) $ 750 $ - $ - $ 325 Year ended February 1, 2003 325 - - - - 325 Year ended January 31, 2004 325 (53) 92 - - 364 Inventory reserves (1): Year ended February 2, 2002 $ 7,654 $ 3,108 $ - $ - $ (202) $ 10,560 Year ended February 1, 2003 10,560 (3,551) - - 125 7,134 Year ended January 31, 2004 7,134 (588) - - 311 6,857is included in accrued expenses.(4) Deducted from net sales. - ---------- (1) The allowance for uncollectible accounts, the allowance for sales returns and the inventory reserves are evaluated at the end of each fiscal quarter and adjusted based on the evaluation. (2) Consists primarily of write-offs of bad debt. (3) Allowance for sales returns is included in accrued expenses. (4) Deducted from net sales. 44All other schedules are omitted because they are not applicable or because the required information is included in the Consolidated Financial Statements or Notes thereto.
51
3.
EXHIBITSExhibits
EXHIBIT NUMBER EXHIBIT - ------- -----------------------------------------------------------------------------------------------Exhibit Number Exhibit 3.1 --— Restated Articles of Incorporation (incorporated by reference from Exhibit 3.1 to the Company'sCompany’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 30, 1994).3.2 --— By-laws, as amended (incorporated by reference from Exhibit 3.2 to the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended February 1, 1997).3.3 --— Articles of Amendment to the Restated Articles of Incorporation (incorporated by reference from Exhibit 3.1 to the Company'sCompany’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1999).4.1 --— Restated Articles of Incorporation (included as Exhibit 3.1). 4.2 --— By-laws (included as Exhibit 3.2). 4.3 --— Form of Common Stock certificate (incorporated by reference from Exhibit 4.3 to the Company'sCompany’s Registration Statement on Form S-1 (Registration No. 33-45949)).4.4 --— Articles of Amendment to the Restated Articles of Incorporation (included as Exhibit 3.3). 4.5 --— Revolving Credit Agreement dated as of January 29, 2003, among the Company and JPMorgan Chase Bank and the Banks listed therein (incorporated by reference from Exhibit 4.5 to the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended February 1, 2003).4.6 --— Term Sheet Agreement dated as of January 29, 2003 evidencing the uncommitted CAN$10 million facility of National City Bank, Canada Branch to Golden Brand Clothing (Canada) Ltd. (incorporated by reference from Exhibit 4.7 to the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended February 1, 2003).4.7 --— Indenture (including forform of note) dated October 21, 2003 among the Company and JPMorgan Chase Bank, as trustee, relating to theCompany'sCompany’s 3.125% Convertible Senior Notes due 2023 (incorporated by reference from Exhibit 4.1 to theCompany'sCompany’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 1, 2003).4.8 --— Registration Rights Agreement dated October 21, 2003 among the Company and Bear Stearns & Co. Inc., Wachovia Capital Markets, LLC, J.P. Morgan Securities Inc., Fleet Securities, Inc. (incorporated by reference from Exhibit 4.2 to the Company'sCompany’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 1, 2003).4.9 --— First Amendment to Revolving Credit Agreement, dated October 13, 2003 among the Company, JPMorgan Chase Bank and the Banks listed therein (incorporated by reference from Exhibit 4.3 to the Company'sCompany’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 1, 2003).*10.1 --4.10 — Second Amendment to Revolving Credit Agreement dated July 7, 2004, by and among the Company, JPMoran Chase Bank and the Banks listed therein (incorporated by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2004). 4.11 — Supplemental Indenture dated January 28, 2005, by and between the Company and JPMorgan Chase Bank, National Association (incorporated by reference from Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Commission on January 28, 2005). *10.1 — 1992 Stock Option Plan (incorporated by reference from Exhibit 10.5 to the Company'sCompany’s Registration Statement on Form S-1 (Registration No. 33-45949)).*10.2 --*10.2 — First Amendment to 1992 Stock Option Plan (incorporated by Reference from Exhibit 10.9 to the Company'sCompany’s Registration Statement on Form S-1 (Registration No. 33-60516)).*10.3 --*10.3 — 1992 Non-Employee Director Stock Option Plan (incorporated by reference from Exhibit 10.7 to(As Amended and Restated Effective January 1, 2004), including theCompany's Registration Statement on Form S-1 (Registration No. 33-45949)). *10.4 -- First Amendment to 1992 Non-Employee Director Stock Option Plan (incorporated by reference from Exhibit 10.16 to the Company's Registration Statement on Form S-1 (Registration No. 33-45949)). 10.5 -- Commercial Lease dated September 1, 1995, byforms of stock option agreement andbetween the Company and Zig Zag, A Joint Venturerestricted stock award agreement (incorporated by reference from Exhibit 10.1 to theCompany's QuarterlyCompany’s Current Report on Form10-Q for8-K filed with thefiscal quarter ended May 4, 1996). 10.6 -- Commercial Lease dated April 5, 1989, by and between the Company and Preston Road Partnership (incorporated by reference from Exhibit 10.10 to the Company's Registration StatementCommission onForm S-1 (Registration No. 33-45949))March 18, 2005).*10.7 --*10.4 — Stock Agreement dated as of March 23, 1992, between the Company and George Zimmer (incorporated by reference from Exhibit 10.13 to the Company'sCompany’s Registration Statement on Form S-1 (Registration No. 33-45949)).*10.8 --*10.5 — Split-Dollar Agreement and related Split-Dollar Collateral Assignment dated November 25, 1994 between the Company, George Zimmer and David Edwab, Co-Trustee of the Zimmer 1994 Irrevocable Trust (incorporated by reference to Exhibit 10.20 to the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended January 28, 1995).45
*10.9 --*10.6 — 1996 Stock OptionLong-Term Incentive Plan (As Amended and Restated Effective March 29, 2004), including the forms of stock option agreement, restricted stock award agreement and deferred stock unit award agreement (incorporated by reference from Exhibit 10.2 to theCompany's QuarterlyCompany’s Current Report on Form10-Q for8-K filed with thefiscal quarter ended August 3, 1996). *10.10 -- Second Amendment to 1992 Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit 10.3 to the Company's Quarterly ReportCommission onForm 10-Q for the fiscal quarter ended August 3, 1996)March 18, 2005).*10.11 --*10.7 — 1998 Key Employee Stock Option Plan (incorporated by reference from Exhibit 10.18 to the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended January 31, 1998).*10.12 --*10.8 — First Amendment to 1998 Key Employee Stock Option Plan (incorporated by reference from Exhibit 4.1 to the Company'sCompany’s Registration Statement on Form S-8 (registration No. 333-80033)).*10.13 --*10.9 — Second Amendment to 1998 Key Employee Stock Option Plan (incorporated by reference to Exhibit 10.22 to the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended January 29, 2000).*10.14 -- Third Amendment to The Men's Wearhouse, Inc. 1992 Non-Employee Director Stock Option Plan (incorporated by reference from52
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended July 29, 2000). *10.15 -- Second Amendment [sic] to The Men's Wearhouse, Inc. 1996 Stock Option Plan (incorporated by reference fromNumber Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended July 29, 2000). *10.16 -- Fourth Amendment to 1992 Non-Employee Director Stock Option Plan (incorporated by reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May 5, 2001). *10.17 --*10.10 — Split-Dollar Agreement dated January 14, 2002, by and between the Company and Eric Lane (incorporated by reference from Exhibit 10.25 to the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended February 2, 2002).*10.18 --*10.11 — Split-Dollar Agreement and related Split-Dollar Collateral Assignment dated May 25, 1995, by and between the Company and David H. Edwab (incorporated by reference from Exhibit 10.26 to the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended February 2, 2002).*10.19 --*10.12 — Split-Dollar Agreement and related Split-Dollar Collateral Assignment dated May 25, 1995, between the Company, David H. Edwab and George Zimmer, Co-Trustee of the David H. Edwab 1995 Irrevocable Trust (incorporated by reference from Exhibit 10.27 to the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended February 2, 2002).*10.20 --*10.13 — First Amendment to Split-Dollar Agreement dated January 17, 2002, between the Company, David H. Edwab and George Zimmer, Trustee of the David H. Edwab 1995 Irrevocable Trust (incorporated by reference from Exhibit 10.28 to the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended February 2, 2002).*10.21 --*10.14 — Amended and Restated Employment Agreement effective as of February 3, 2003, by and between the Company and David H. Edwab (incorporated by reference from Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31,2004). *10.15 — Aircraft Lease Agreement dated August 20, 2004, by and between Regal Aviation LLC and MW Sky LLC (incorporated by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2004). *10.16 — 2004 Long-Term Incentive Plan (filed herewith). 14.1 -- The Company's Code of Ethics for Senior Management (filed herein)*10.17 — Succession Agreement between the Company and Eric J. Lane (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on March 4, 2005). 21.1 --— Subsidiaries of the Company (filed herewith). 23.1 --— Consent of Deloitte & Touche LLP, independent auditors (filed herewith). 31.1 --— Certification of Annual Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer (filed herewith). 31.2 --— Certification of Annual Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer (filed herewith). 32.1 --— Certification of Annual Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer (filed herewith). 32.2 --— Certification of Annual Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer (filed herewith). - ---------- *
* Management Compensation or Incentive Plan The Company will furnish a copy of any exhibit described above to any beneficial holder of its securities upon receipt of a written request therefore, provided that such request sets forth a good faith representation that, as of the record date for the
Company's 2004Company’s 2005 Annual Meeting of Shareholders, such beneficial holder is entitled to vote at such meeting, and provided further that such holder pays to the Company a fee compensating the Company for its reasonable expenses in furnishing such exhibits.(b) REPORTS ON FORM 8-K 46On November 19, 2003, the Company furnished to the SEC a current report on Form 8-K pursuant to Item 12 reporting the issuance of a press release that reported earnings results for the three and nine months ended November 1, 2003. 4753
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE MEN'S WEARHOUSE, INC. By /s/ GEORGE ZIMMER ----------------------------- George Zimmer Chairman of the Board and Chief Executive Officer
THE MEN’S WEARHOUSE, INC. By /s/ GEORGE ZIMMER George Zimmer Chairman of the Board and Chief Executive Officer Dated: April
15, 200428, 2005Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------ ------------------------------------------ --------------/s/Signature Title Date /s/ GEORGE ZIMMER Chairman of the Board, Chief April 15, 2004 - ------------------------28, 2005George Zimmer Executive Officer and Director George Zimmer /s//s/ NEILL P. DAVIS Executive Vice President, Chief Financial April 15, 2004 - ------------------------28, 2005Neill P. Davis Officer and Principal Financial Officer Neill P. Davis /s//s/ DIANA M. WILSON Senior Vice President and Principal Accounting Officer April 15, 2004 - ------------------------ Officer28, 2005Diana M. Wilson /s//s/ DAVID H. EDWAB Vice Chairman of the Board and Director April 15, 2004 - ------------------------28, 2005David H. Edwab /s//s/ RINALDO S. BRUTOCO Director April 15, 2004 - ------------------------28, 2005Rinaldo S. Brutoco /s//s/ MICHAEL L. RAY Director April 15, 2004 - ------------------------28, 2005Michael L. Ray /s//s/ SHELDON I. STEIN Director April 15, 2004 - ------------------------28, 2005Sheldon I. Stein /s/ KATHLEES/s/ KATHLEEN MASON Director April 15, 2004 - ------------------------28, 2005Kathleen Mason /s/ DEEPAK CHOPRA Director April 28, 2005 Deepak Chopra /s/ WILLIAM B. SECHREST Director April 28, 2005 William B. Sechrest 48EXHIBIT INDEX54
Exhibit Index
EXHIBIT NUMBER EXHIBIT - ------- -----------------------------------------------------------------------------------------------Exhibit Number Exhibit 3.1 --— Restated Articles of Incorporation (incorporated by reference from Exhibit 3.1 to the Company'sCompany’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 30, 1994).3.2 --— By-laws, as amended (incorporated by reference from Exhibit 3.2 to the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended February 1, 1997).3.3 --— Articles of Amendment to the Restated Articles of Incorporation (incorporated by reference from Exhibit 3.1 to the Company'sCompany’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1999).4.1 --— Restated Articles of Incorporation (included as Exhibit 3.1). 4.2 --— By-laws (included as Exhibit 3.2). 4.3 --— Form of Common Stock certificate (incorporated by reference from Exhibit 4.3 to the Company'sCompany’s Registration Statement on Form S-1 (Registration No. 33-45949)).4.4 --— Articles of Amendment to the Restated Articles of Incorporation (included as Exhibit 3.3). 4.5 --— Revolving Credit Agreement dated as of January 29, 2003, among the Company and JPMorgan Chase Bank and the Banks listed therein (incorporated by reference from Exhibit 4.5 to the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended February 1, 2003).4.6 --— Term Sheet Agreement dated as of January 29, 2003 evidencing the uncommitted CAN$10 million facility of National City Bank, Canada Branch to Golden Brand Clothing (Canada) Ltd. (incorporated by reference from Exhibit 4.7 to the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended February 1, 2003).4.7 --— Indenture (including forform of note) dated October 21, 2003 among the Company and JPMorgan Chase Bank, as trustee, relating to theCompany'sCompany’s 3.125% Convertible Senior Notes due 2023 (incorporated by reference from Exhibit 4.1 to theCompany'sCompany’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 1, 2003).4.8 --— Registration Rights Agreement dated October 21, 2003 among the Company and Bear Stearns & Co. Inc., Wachovia Capital Markets, LLC, J.P. Morgan Securities Inc., Fleet Securities, Inc. (incorporated by reference from Exhibit 4.2 to the Company'sCompany’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 1, 2003).4.9 --— First Amendment to Revolving Credit Agreement, dated October 13, 2003 among the Company, JPMorgan Chase Bank and the Banks listed therein (incorporated by reference from Exhibit 4.3 to the Company'sCompany’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 1, 2003).*10.1 --4.10 — Second Amendment to Revolving Credit Agreement dated July 7, 2004, by and among the Company, JPMoran Chase Bank and the Banks listed therein (incorporated by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2004). 4.11 — Supplemental Indenture dated January 28, 2005, by and between the Company and JPMorgan Chase Bank, National Association (incorporated by reference from Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Commission on January 28, 2005). *10.1 — 1992 Stock Option Plan (incorporated by reference from Exhibit 10.5 to the Company'sCompany’s Registration Statement on Form S-1 (Registration No. 33-45949)).*10.2 --*10.2 — First Amendment to 1992 Stock Option Plan (incorporated by Reference from Exhibit 10.9 to the Company'sCompany’s Registration Statement on Form S-1 (Registration No. 33-60516)).*10.3 --*10.3 — 1992 Non-Employee Director Stock Option Plan (incorporated by reference from Exhibit 10.7 to the Company's Registration Statement on Form S-1 (Registration No. 33-45949)). *10.4 -- First Amendment to 1992 Non-Employee Director Stock Option Plan (incorporated by reference from Exhibit 10.16 to the Company's Registration Statement on Form S-1 (Registration No. 33-45949)). 10.5 -- Commercial Lease dated September(As Amended and Restated Effective January 1,1995, by2004), including forms of stock option agreement andbetween the Company and Zig Zag, A Joint Venturerestricted stock award agreement (incorporated by reference from Exhibit 10.1 to theCompany's QuarterlyCompany’s Current Report on Form10-Q for8-K filed with thefiscal quarter ended May 4, 1996). 10.6 -- Commercial Lease dated April 5, 1989, by and between the Company and Preston Road Partnership (incorporated by reference from Exhibit 10.10 to the Company's Registration StatementCommission onForm S-1 (Registration No. 33-45949))March 18, 2005).*10.7 --*10.4 — Stock Agreement dated as of March 23, 1992, between the Company and George Zimmer (incorporated by reference from Exhibit 10.13 to the Company'sCompany’s Registration Statement on Form S-1 (Registration No. 33-45949)).*10.8 --*10.5 — Split-Dollar Agreement and related Split-Dollar Collateral Assignment dated November 25, 1994 between the Company, George Zimmer and David Edwab, Co-Trustee of the Zimmer 1994 Irrevocable Trust (incorporated by reference to Exhibit 10.20 to the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended January 28, 1995).*10.9 --*10.6 — 1996 Long-Term Incentive Plan (As Amended and Restated Effective March 29, 2004), including the forms of stock option agreement, restricted stock award agreement and deferred stock unit award agreement (incorporated by reference from Exhibit 10.20 to the Company’s Current Report on Form 8-K filed with the Commission on March 18, 2005). 60
Exhibit Number Exhibit *10.7 — 1998 Key Employee Stock Option Plan (incorporated by reference from Exhibit 10.210.18 to theCompany's Quarterly Report on Form 10-Q for the fiscal quarter ended August 3, 1996). *10.10 -- Second Amendment to 1992 Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 3, 1996). *10.11 -- 1998 Key Employee Stock Option Plan (incorporated by reference from Exhibit 10.18 to the49
Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended January 31, 1998).*10.12 --*10.8 — First Amendment to 1998 Key Employee Stock Option Plan (incorporated by reference from Exhibit 4.1 to the Company'sCompany’s Registration Statement on Form S-8 (registration No. 333-80033)).*10.13 --*10.9 — Second Amendment to 1998 Key Employee Stock Option Plan (incorporated by reference to Exhibit 10.22 to the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended January 29, 2000).*10.14 -- Third Amendment to The Men's Wearhouse, Inc. 1992 Non-Employee Director Stock Option Plan (incorporated by reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended July 29, 2000). *10.15 -- Second Amendment [sic] to The Men's Wearhouse, Inc. 1996 Stock Option Plan (incorporated by reference from Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended July 29, 2000). *10.16 -- Fourth Amendment to 1992 Non-Employee Director Stock Option Plan (incorporated by reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May 5, 2001). *10.17 --*10.10 — Split-Dollar Agreement dated January 14, 2002, by and between the Company and Eric Lane (incorporated by reference from Exhibit 10.25 to the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended February 2, 2002).*10.18 --*10.11 — Split-Dollar Agreement and related Split-Dollar Collateral Assignment dated May 25, 1995, by and between the Company and David H. Edwab (incorporated by reference from Exhibit 10.26 to the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended February 2, 2002).*10.19 --*10.12 — Split-Dollar Agreement and related Split-Dollar Collateral Assignment dated May 25, 1995, between the Company, David H. Edwab and George Zimmer, Co-Trustee of the David H. Edwab 1995 Irrevocable Trust (incorporated by reference from Exhibit 10.27 to the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended February 2, 2002).*10.20 --*10.13 — First Amendment to Split-Dollar Agreement dated January 17, 2002, between the Company, David H. Edwab and George Zimmer, Trustee of the David H. Edwab 1995 Irrevocable Trust (incorporated by reference from Exhibit 10.28 to the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended February 2, 2002).*10.21 --*10.14 — Amended and Restated Employment Agreement effective as of February 3, 2003, by and between the Company and David H. Edwab (incorporated by reference from Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004). *10.15 — Aircraft Lease Agreement dated August 20, 2004, by and between Regal Aviation LLC and MW Sky LLC (incorporated by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2004). *10.16 — 2004 Long-Term Incentive Plan (filed herewith). 14.1 -- The Company's Code of Ethics for Senior Management (filed herein)*10.17 — Succession Agreement between the Company and Eric J. Lane (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on March 4, 2005). 21.1 --— Subsidiaries of the Company (filed herewith). 23.1 --— Consent of Deloitte & Touche LLP, independent auditors (filed herewith). 31.1 --— Certification of Annual Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer (filed herewith). 31.2 --— Certification of Annual Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer (filed herewith). 32.1 --— Certification of Annual Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer (filed herewith). 32.2 --— Certification of Annual Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer (filed herewith). - ---------- * Management Compensation or Incentive Plan 50
* Management Compensation or Incentive Plan 61