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TLRDQ Tailored Brands

Filed: 12 Sep 18, 8:00pm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended August 4, 2018 or

 

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

 

For the transition period from                   to                  

 

Commission file number 1-16097

 

TAILORED BRANDS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Texas

 

47-4908760

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification Number)

 

 

 

6380 Rogerdale Road

 

 

Houston, Texas

 

77072-1624

(Address of Principal Executive Offices)

 

(Zip Code)

 

(281) 776-7000

(Registrant's telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer  ☒

Accelerated filer  ☐

Non-accelerated filer  ☐

Smaller reporting company  ☐

Emerging growth company  ☐

 

 

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

 

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

 

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

 

 

 


 

 


 

Forward-Looking Statements

 

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

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

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

 

1


 

PART I – FINANCIAL INFORMATION

 

ITEM 1 – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

TAILORED BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

    

August 4,

    

July 29,

    

February 3,

 

 

 

2018

 

2017

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

68,215

 

$

112,741

 

$

103,607

 

Accounts receivable, net

 

 

65,099

 

 

71,900

 

 

79,783

 

Inventories

 

 

786,510

 

 

944,783

 

 

851,931

 

Other current assets

 

 

87,491

 

 

55,432

 

 

78,252

 

Total current assets

 

 

1,007,315

 

 

1,184,856

 

 

1,113,573

 

PROPERTY AND EQUIPMENT, net

 

 

427,107

 

 

459,530

 

 

460,674

 

RENTAL PRODUCT, net

 

 

111,345

 

 

139,397

 

 

123,730

 

GOODWILL

 

 

103,686

 

 

119,880

 

 

120,292

 

INTANGIBLE ASSETS, net

 

 

165,881

 

 

170,113

 

 

168,987

 

OTHER ASSETS

 

 

13,497

 

 

5,948

 

 

12,699

 

TOTAL ASSETS

 

$

1,828,831

 

$

2,079,724

 

$

1,999,955

 

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

145,981

 

$

140,156

 

$

145,106

 

Accrued expenses and other current liabilities

 

 

313,319

 

 

276,616

 

 

285,537

 

Income taxes payable

 

 

6,659

 

 

6,310

 

 

6,121

 

Current portion of long-term debt

 

 

9,000

 

 

8,750

 

 

7,000

 

Total current liabilities

 

 

474,959

 

 

431,832

 

 

443,764

 

LONG-TERM DEBT, net

 

 

1,207,377

 

 

1,532,255

 

 

1,389,808

 

DEFERRED TAXES, net AND OTHER LIABILITIES

 

 

146,484

 

 

162,313

 

 

164,191

 

Total liabilities

 

 

1,828,820

 

 

2,126,400

 

 

1,997,763

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY (DEFICIT):

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

 

 —

 

 

 —

 

 

 —

 

Common stock

 

 

498

 

 

491

 

 

492

 

Capital in excess of par

 

 

498,670

 

 

478,174

 

 

491,648

 

Accumulated deficit

 

 

(470,377)

 

 

(497,160)

 

 

(479,166)

 

Accumulated other comprehensive loss

 

 

(28,780)

 

 

(28,181)

 

 

(10,782)

 

Total shareholders' equity (deficit)

 

 

11

 

 

(46,676)

 

 

2,192

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

 

$

1,828,831

 

$

2,079,724

 

$

1,999,955

 

 

See Notes to Condensed Consolidated Financial Statements.

2


 

TAILORED BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

    

August 4, 2018

    

July 29, 2017

    

August 4, 2018

    

July 29, 2017

 

Net sales:

 

 

    

 

 

    

 

 

    

    

 

    

 

Retail clothing product

 

$

605,788

 

$

594,994

 

$

1,219,432

 

$

1,178,579

 

Rental services

 

 

125,095

 

 

151,978

 

 

225,322

 

 

246,798

 

Alteration and other services

 

 

37,031

 

 

46,026

 

 

78,003

 

 

92,926

 

Total retail sales

 

 

767,914

 

 

792,998

 

 

1,522,757

 

 

1,518,303

 

Corporate apparel clothing product

 

 

55,516

 

 

57,760

 

 

118,637

 

 

115,361

 

Total net sales

 

 

823,430

 

 

850,758

 

 

1,641,394

 

 

1,633,664

 

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail clothing product

 

 

259,025

 

 

248,630

 

 

535,245

 

 

501,509

 

Rental services

 

 

19,366

 

 

23,957

 

 

34,023

 

 

40,125

 

Alteration and other services

 

 

33,749

 

 

35,076

 

 

67,927

 

 

69,548

 

Occupancy costs

 

 

101,772

 

 

103,326

 

 

202,791

 

 

208,415

 

Total retail cost of sales

 

 

413,912

 

 

410,989

 

 

839,986

 

 

819,597

 

Corporate apparel clothing product

 

 

40,616

 

 

43,073

 

 

87,282

 

 

84,931

 

Total cost of sales

 

 

454,528

 

 

454,062

 

 

927,268

 

 

904,528

 

Gross margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail clothing product

 

 

346,763

 

 

346,364

 

 

684,187

 

 

677,070

 

Rental services

 

 

105,729

 

 

128,021

 

 

191,299

 

 

206,673

 

Alteration and other services

 

 

3,282

 

 

10,950

 

 

10,076

 

 

23,378

 

Occupancy costs

 

 

(101,772)

 

 

(103,326)

 

 

(202,791)

 

 

(208,415)

 

Total retail gross margin

 

 

354,002

 

 

382,009

 

 

682,771

 

 

698,706

 

Corporate apparel clothing product

 

 

14,900

 

 

14,687

 

 

31,355

 

 

30,430

 

Total gross margin

 

 

368,902

 

 

396,696

 

 

714,126

 

 

729,136

 

Advertising expense

 

 

38,661

 

 

39,888

 

 

79,894

 

 

82,140

 

Selling, general and administrative expenses

 

 

242,255

 

 

248,343

 

 

493,349

 

 

507,529

 

Operating income

 

 

87,986

 

 

108,465

 

 

140,883

 

 

139,467

 

Interest income

 

 

122

 

 

98

 

 

207

 

 

165

 

Interest expense

 

 

(20,864)

 

 

(25,167)

 

 

(42,845)

 

 

(50,788)

 

(Loss) gain on extinguishment of debt, net

 

 

(8,122)

 

 

3,281

 

 

(20,833)

 

 

3,996

 

Earnings before income taxes

 

 

59,122

 

 

86,677

 

 

77,412

 

 

92,840

 

Provision for income taxes

 

 

9,884

 

 

28,206

 

 

14,265

 

 

32,530

 

Net earnings

 

$

49,238

 

$

58,471

 

$

63,147

 

$

60,310

 

Net earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.99

 

$

1.19

 

$

1.27

 

$

1.23

 

Diluted

 

$

0.97

 

$

1.19

 

$

1.24

 

$

1.23

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

49,840

 

 

49,107

 

 

49,649

 

 

48,958

 

Diluted

 

 

50,851

 

 

49,172

 

 

50,785

 

 

49,162

 

Cash dividends declared per common share

 

$

0.18

 

$

0.18

 

$

0.36

 

$

0.36

 

 

See Notes to Condensed Consolidated Financial Statements.

 

3


 

TAILORED BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

    

August 4,

    

July 29,

    

August 4,

    

July 29,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

49,238

 

$

58,471

 

$

63,147

 

$

60,310

 

Currency translation adjustments

 

 

(7,824)

 

 

14,773

 

 

(21,967)

 

 

16,114

 

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

 

 

1,169

 

 

(746)

 

 

3,969

 

 

(4,212)

 

Comprehensive income

 

$

42,583

 

$

72,498

 

$

45,149

 

$

72,212

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

4


 

TAILORED BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

 

    

August 4, 2018

    

July 29, 2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net earnings

 

$

63,147

 

$

60,310

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

52,719

 

 

53,407

 

Rental product amortization

 

 

19,755

 

 

21,205

 

Loss (gain) on extinguishment of debt, net

 

 

20,833

 

 

(3,996)

 

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

 

 

2,228

 

 

3,661

 

Loss on disposition of assets

 

 

7,768

 

 

1,381

 

Asset impairment charges

 

 

269

 

 

2,867

 

Share-based compensation

 

 

9,416

 

 

8,095

 

Deferred tax benefit

 

 

(2,240)

 

 

(242)

 

Deferred rent expense and other

 

 

247

 

 

309

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

10,461

 

 

(4,832)

 

Inventories

 

 

42,186

 

 

15,701

 

Rental product

 

 

(12,102)

 

 

(8,521)

 

Other assets

 

 

(9,372)

 

 

16,112

 

Accounts payable, accrued expenses and other current liabilities

 

 

(3,497)

 

 

(28,444)

 

Income taxes payable

 

 

697

 

 

4,964

 

Other liabilities

 

 

(4,524)

 

 

(1,448)

 

Net cash provided by operating activities

 

 

197,991

 

 

140,529

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Capital expenditures

 

 

(24,645)

 

 

(33,973)

 

Proceeds from divestiture of business

 

 

17,755

 

 

 —

 

Acquisition of business, net of cash

 

 

 —

 

 

(457)

 

Proceeds from sales of property and equipment

 

 

 —

 

 

2,157

 

Net cash used in investing activities

 

 

(6,890)

 

 

(32,273)

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Payments on original term loan

 

 

(993,420)

 

 

(8,129)

 

Proceeds from new term loan

 

 

895,500

 

 

 —

 

Payments on new term loan

 

 

(4,500)

 

 

 —

 

Proceeds from asset-based revolving credit facility

 

 

199,500

 

 

181,550

 

Payments on asset-based revolving credit facility

 

 

(95,000)

 

 

(181,550)

 

Repurchase and retirement of senior notes

 

 

(199,365)

 

 

(45,167)

 

Deferred financing costs

 

 

(5,644)

 

 

 —

 

Cash dividends paid

 

 

(18,744)

 

 

(18,033)

 

Proceeds from issuance of common stock

 

 

4,113

 

 

927

 

Tax payments related to vested deferred stock units

 

 

(6,501)

 

 

(1,644)

 

Net cash used in financing activities

 

 

(224,061)

 

 

(72,046)

 

Effect of exchange rate changes

 

 

(2,432)

 

 

5,642

 

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

 

(35,392)

 

 

41,852

 

Balance at beginning of period

 

 

103,607

 

 

70,889

 

Balance at end of period

 

$

68,215

 

$

112,741

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

5


 

Table of Contents

TAILORED BRANDS, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Significant Accounting Policies  

 

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

 

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

 

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

 

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

 

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

 

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

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

6


 

Table of Contents

TAILORED BRANDS, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

2.  Divestiture of MW Cleaners

 

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

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

 

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

 

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

 

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

 

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TAILORED BRANDS, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.  Earnings Per Share    

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

 

August 4,

 

July 29,

 

August 4,

 

July 29,

 

 

    

2018

    

2017

    

2018

    

2017

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

49,238

 

$

58,471

 

$

63,147

 

$

60,310

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted-average common shares outstanding

 

 

49,840

 

 

49,107

 

 

49,649

 

 

48,958

 

Dilutive effect of share-based awards

 

 

1,011

 

 

65

 

 

1,136

 

 

204

 

Diluted weighted-average common shares outstanding

 

 

50,851

 

 

49,172

 

 

50,785

 

 

49,162

 

Net earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.99

 

$

1.19

 

$

1.27

 

$

1.23

 

Diluted

 

$

0.97

 

$

1.19

 

$

1.24

 

$

1.23

 

 

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

 

5.  Debt

 

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

 

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

 

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Credit Facilities

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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

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

 

Senior Notes

 

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

 

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

 

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

 

Long-Term Debt

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

August 4,

 

July 29,

 

February 3,

 

 

    

2018

    

2017

    

2018

 

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

 

$

891,210

 

$

1,035,030

 

$

990,465

 

Senior Notes

 

 

228,607

 

 

525,000

 

 

421,209

 

ABL Facility

 

 

104,500

 

 

 —

 

 

 —

 

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

 

 

(7,940)

 

 

(19,025)

 

 

(14,866)

 

Total long-term debt, net

 

 

1,216,377

 

 

1,541,005

 

 

1,396,808

 

Current portion of long-term debt

 

 

(9,000)

 

 

(8,750)

 

 

(7,000)

 

Total long-term debt, net of current portion

 

$

1,207,377

 

$

1,532,255

 

$

1,389,808

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

6.  Revenue Recognition

 

Adoption of ASC 606

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported

 

 

 

Adjusted

 

 

 

Balance at

 

Impact of

 

Balance at

 

 

 

February 3,

 

Adoption of

 

February 3,

 

 

    

2018

    

ASU 606

    

2018

 

Assets:

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

79,783

 

$

(303)

 

$

79,480

 

Inventories

 

 

851,931

 

 

(17,837)

 

 

834,094

 

Other current assets

 

 

78,252

 

 

2,753

 

 

81,005

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

Accrued expenses and other current liabilities

 

 

285,537

 

 

32,378

 

 

317,915

 

Deferred taxes, net and other liabilities

 

 

164,191

 

 

(11,941)

 

 

152,250

 

Equity:

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

 

(479,166)

 

 

(35,824)

 

 

(514,990)

 

 

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Revenues

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

    

August 4, 2018

    

July 29, 2017

    

August 4, 2018

    

July 29, 2017

 

Net sales:

 

 

    

 

 

    

 

 

    

 

 

    

 

Men's tailored clothing product

 

$

356,504

 

$

341,182

 

$

712,241

 

$

673,812

 

Men's non-tailored clothing product

 

 

229,105

 

 

234,093

 

 

464,711

 

 

462,792

 

Women's clothing product

 

 

17,447

 

 

18,100

 

 

37,029

 

 

37,927

 

Other (1)

 

 

2,732

 

 

1,619

 

 

5,451

 

 

4,048

 

Total retail clothing product

 

 

605,788

 

 

594,994

 

 

1,219,432

 

 

1,178,579

 

Rental services

 

 

125,095

 

 

151,978

 

 

225,322

 

 

246,798

 

Alteration services

 

 

37,031

 

 

37,227

 

 

75,452

 

 

75,613

 

Retail dry cleaning services (2)

 

 

 —

 

 

8,799

 

 

2,551

 

 

17,313

 

Total alteration and other services

 

 

37,031

 

 

46,026

 

 

78,003

 

 

92,926

 

Total retail sales

 

 

767,914

 

 

792,998

 

 

1,522,757

 

 

1,518,303

 

Corporate apparel clothing product

 

 

55,516

 

 

57,760

 

 

118,637

 

 

115,361

 

Total net sales

 

$

823,430

 

$

850,758

 

$

1,641,394

 

$

1,633,664

 


(1)

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

(2)

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

 

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

 

Retail Segment

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

 

Loyalty Program

 

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

 

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

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

 

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

 

Gift Card Breakage

 

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

 

Sales Returns

 

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

 

Corporate Apparel Segment

 

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

 

Contract Liabilities

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at

 

Increase

 

Balance at

 

 

    

February 3, 2018

    

(Decrease)

    

August 4, 2018

 

 

 

As Adjusted

 

 

 

 

 

 

 

Contract liabilities

 

$

141,552

 

$

21,858

 

$

163,410

 

 

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

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(Unaudited)

 

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

 

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

 

Practical Expedients and Impact on Fiscal 2018 Results

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Statement of Earnings

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended August 4, 2018

 

 

 

As

 

Amounts Under

 

Effect of Change

 

 

    

Reported

    

Legacy GAAP

    

Increase/(Decrease)

 

Net sales:

 

 

 

 

 

 

 

 

 

 

Total retail sales

 

$

767,914

 

$

762,538

 

$

(5,376)

 

Corporate apparel clothing product

 

 

55,516

 

 

57,394

 

 

1,878

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

Total retail cost of sales

 

 

413,912

 

 

413,640

 

 

(272)

 

Total corporate apparel clothing product cost of sales

 

 

40,616

 

 

42,054

 

 

1,438

 

Selling, general and administrative expenses

 

 

242,255

 

 

241,847

 

 

(408)

 

Provision for income taxes

 

 

9,884

 

 

9,172

 

 

(712)

 

Net earnings

 

 

49,238

 

 

45,694

 

 

(3,544)

 

Diluted net earnings per common share

 

$

                   0.97

 

$

                  0.90

 

$

(0.07)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended August 4, 2018

 

 

 

As

 

Amounts Under

 

Effect of Change

 

 

    

Reported

    

Legacy GAAP

    

Increase/(Decrease)

 

Net sales:

 

 

 

 

 

 

 

 

 

 

Total retail sales

 

$

1,522,757

 

$

1,520,626

 

$

(2,131)

 

Corporate apparel clothing product

 

 

118,637

 

 

123,896

 

 

5,259

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

Total retail cost of sales

 

 

839,986

 

 

839,966

 

 

(20)

 

Total corporate apparel clothing product cost of sales

 

 

87,282

 

 

91,529

 

 

4,247

 

Selling, general and administrative expenses

 

 

493,349

 

 

492,604

 

 

(745)

 

Provision for income taxes

 

 

14,265

 

 

14,200

 

 

(65)

 

Net earnings

 

 

63,147

 

 

62,858

 

 

(289)

 

Diluted net earnings per common share

 

$

1.24

 

$

1.24

 

$

 —

 

 

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TAILORED BRANDS, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet

 

August 4, 2018

 

 

 

As

 

Amounts Under

 

Effect of Change

 

 

    

Reported

    

Legacy GAAP

    

Increase/(Decrease)

 

Assets:

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

65,099

 

$

67,978

 

$

2,879

 

Inventories

 

 

786,510

 

 

799,258

 

 

12,748

 

Other current assets

 

 

87,491

 

 

84,904

 

 

(2,587)

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

Accrued expenses and other current liabilities

 

 

313,319

 

 

262,711

 

 

(50,608)

 

Deferred taxes, net and other liabilities

 

 

146,484

 

 

134,517

 

 

(11,967)

 

Equity:

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

$

(470,377)

 

$

(434,842)

 

$

35,535

 

 

 

7.  Supplemental Cash Flows

 

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

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

 

 

August 4,

 

July 29,

 

 

    

2018

    

2017

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

41,481

 

$

51,052

 

Cash paid for income taxes, net

 

$

15,664

 

$

14,591

 

 

We had unpaid capital expenditure purchases included in accounts payable and accrued expenses and other current liabilities of approximately $6.3 million and $6.9 million at August 4, 2018 and July 29, 2017, respectively.  Capital expenditure purchases are recorded as cash outflows from investing activities in the condensed consolidated statement of cash flows in the period they are paid.  

 

8.  Inventories

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

August 4,

 

July 29,

 

February 3,

 

 

    

2018

    

2017

    

2018

 

Finished goods

 

$

675,405

 

$

841,101

 

$

739,668

 

Raw materials and merchandise components

 

 

111,105

 

 

103,682

 

 

112,263

 

Total inventories

 

$

786,510

 

$

944,783

 

$

851,931

 

 

 

 

 

 

 

 

 

 

 

 

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TAILORED BRANDS, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

9.  Income Taxes

 

In December 2017, the U.S. enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Reform Act”). The changes included in the Tax Reform Act are broad and complex, including, but not limited to reducing the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018.  Our federal income tax expense for fiscal 2018 is based on the new rate. 

 

Our effective income tax rate decreased to 16.7% for the second quarter of 2018 from 32.5% for the second quarter of 2017 primarily from enactment of the Tax Reform Act as well as the release of $3.1 million of state valuation allowances.

 

Our effective income tax rate decreased to 18.4% for the first six months of 2018 from 35.0% for the first six months of 2017 primarily from enactment of the Tax Reform Act, the release of $3.1 million of state valuation allowances and anniversarying last year’s $2.2 million of tax deficiencies related to the vesting of stock-based awards recorded in the first six months of 2017 resulting from the adoption of new accounting guidance related to stock-based compensation.

 

Shortly after the Tax Reform Act was enacted, the SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) which provides guidance on accounting for the Tax Reform Act’s impact. SAB 118 provides a measurement period, which in no case should extend beyond one year from the Tax Reform Act enactment date, during which a company acting in good faith may complete the accounting for the impacts of the Tax Reform Act. In accordance with SAB 118, a company must reflect the income tax effects of the Tax Reform Act in the reporting period in which the accounting is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Reform Act is incomplete, a company can determine a reasonable estimate for those effects and record a provisional estimate in the financial statements in the first reporting period in which a reasonable estimate can be determined.

At the end of fiscal 2017, we recorded a provisional discrete net tax benefit of $0.3 million related to the Tax Reform Act as well as a provisional estimate of incremental withholding liabilities on our investment in foreign earnings totaling $17.3 million as we no longer intend to permanently reinvest our foreign earnings from Canada. 

 

During the first six months of 2018, there have been no material updates to these provisional amounts. While we have made a reasonable estimate of the impact of the Tax Reform Act, we are continuing to finalize the consequences of tax reform, including analyzing additional information related to the Tax Reform Act as supplemental legislation, regulatory guidance, or evolving technical interpretations become available.  We expect that our transition tax and the temporary differences that existed on the date of enactment will be presumed final once our federal return is filed. 

 

Additionally, we are currently undergoing several audits; however, we currently do not believe these audits will result in any material charge to tax expense in the future.

 

 

 

 

 

 

 

 

 

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TAILORED BRANDS, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

10.  Other Current Assets, Accrued Expenses and Other Current Liabilities and Deferred Taxes, net and Other Liabilities 

 

The following table provides details on our other current assets as of August 4, 2018, July 29, 2017 and February 3, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

August 4,

 

July 29,

 

February 3,

 

 

    

2018

    

2017

    

2018

 

Prepaid expenses

 

$

57,197

 

$

45,718

 

$

47,545

 

Tax receivable

 

 

17,401

 

 

2,428

 

 

20,368

 

Other

 

 

12,893

 

 

7,286

 

 

10,339

 

Total other current assets

 

$

87,491

 

$

55,432

 

$

78,252

 

 

The following table provides details on our accrued expenses and other current liabilities as of August 4, 2018, July 29, 2017 and February 3, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

August 4,

    

July 29,

    

February 3,

 

 

 

2018

 

2017

 

2018

 

Accrued salary, bonus, sabbatical, vacation and other benefits

 

$

69,839

 

$

61,431

 

$

84,767

 

Customer deposits, prepayments and refunds payable

 

 

66,261

 

 

54,043

 

 

59,633

 

Loyalty program liabilities

 

 

63,295

 

 

9,226

 

 

9,106

 

Unredeemed gift cards

 

 

28,152

 

 

36,245

 

 

39,609

 

Accrued workers compensation and medical costs

 

 

26,146

 

 

27,009

 

 

25,244

 

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

 

 

24,197

 

 

33,472

 

 

29,409

 

Accrued dividends

 

 

10,918

 

 

10,456

 

 

11,128

 

Accrued interest

 

 

2,379

 

 

12,477

 

 

3,281

 

Accrued royalties

 

 

1,398

 

 

4,515

 

 

5,032

 

Lease termination and other store closure costs

 

 

132

 

 

3,135

 

 

427

 

Other

 

 

20,602

 

 

24,607

 

 

17,901

 

Total accrued expenses and other current liabilities

 

$

313,319

 

$

276,616

 

$

285,537

 

 

The increase in loyalty program liabilities and the decrease in unredeemed gift cards is primarily driven by the adoption of ASC 606, effective February 4, 2018.  Please see Note 6 for additional information.

 

The following table provides details on our deferred taxes, net and other liabilities as of August 4, 2018, July 29, 2017 and February 3, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

August 4,

    

July 29,

 

February 3,

 

 

    

2018

    

2017

    

2018

 

Deferred and other income tax liabilities, net

 

$

80,413

 

$

90,957

 

$

95,314

 

Deferred rent and landlord incentives

 

 

58,801

 

 

60,467

 

 

60,136

 

Unfavorable lease liabilities

 

 

2,357

 

 

3,760

 

 

2,910

 

Other

 

 

4,913

 

 

7,129

 

 

5,831

 

Total deferred taxes, net and other liabilities

 

$

146,484

 

$

162,313

 

$

164,191

 

 

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TAILORED BRANDS, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

11.  Accumulated Other Comprehensive (Loss) Income

 

The following table summarizes the components of accumulated other comprehensive (loss) income for the six months ended August 4, 2018 (in thousands and net of tax):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

 

 

 

 

 

 

Currency

 

Cash Flow

 

Pension

 

 

 

 

 

    

Translation

    

Hedges

    

Plan

    

Total

 

BALANCE— February 3, 2018

 

$

(11,116)

 

$

145

 

$

189

 

$

(10,782)

 

Other comprehensive (loss) income before reclassifications

 

 

(21,967)

 

 

2,630

 

 

 —

 

 

(19,337)

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

1,339

 

 

 —

 

 

1,339

 

Net current-period other comprehensive (loss) income

 

 

(21,967)

 

 

3,969

 

 

 —

 

 

(17,998)

 

BALANCE— August 4, 2018

 

$

(33,083)

 

$

4,114

 

$

189

 

$

(28,780)

 

 

The following table summarizes the components of accumulated other comprehensive (loss) income for the six months ended July 29, 2017 (in thousands and net of tax):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

 

 

 

 

 

 

Currency

 

Cash Flow

 

Pension

 

 

 

 

 

     

Translation

    

Hedges

    

Plan

    

Total

 

BALANCE— January 28, 2017

 

$

(40,205)

 

$

(82)

 

$

204

 

$

(40,083)

 

Other comprehensive income (loss) before reclassifications

 

 

16,114

 

 

(5,482)

 

 

 

 

10,632

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

1,270

 

 

 

 

1,270

 

Net current-period other comprehensive income (loss)

 

 

16,114

 

 

(4,212)

 

 

 —

 

 

11,902

 

BALANCE— July 29, 2017

 

$

(24,091)

 

$

(4,294)

 

$

204

 

$

(28,181)

 

 

Amounts reclassified from other comprehensive (loss) income for the six months ended August 4, 2018 and July 29, 2017 relate to changes in the fair value of our interest rate swaps which is recorded within interest expense in the condensed consolidated statement of earnings and changes in the fair value of cash flow hedges related to inventory purchases, which is recorded within cost of sales in the condensed consolidated statement of earnings.

 

12.  Share-Based Compensation Plans

 

For a discussion of our share-based compensation plans, please see Note 13 in our Annual Report on Form 10-K for the fiscal year ended February 3, 2018.

 

 

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TAILORED BRANDS, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Non-Vested Deferred Stock Units and Performance Units

 

The following table summarizes the activity of time-based and performance-based awards (collectively, "DSUs") for the six months ended August 4, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-Average

 

 

 

Units

 

Grant-Date Fair Value

 

 

 

Time-

 

Performance-

 

Time-

 

Performance-

 

 

    

Based

    

Based

    

Based

    

Based

 

Non-Vested at February 3, 2018

 

1,014,689

 

993,631

 

$

18.13

 

$

19.55

 

Granted

 

485,715

 

242,509

 

 

28.42

 

 

28.54

 

Vested(1)

 

(497,676)

 

(131,074)

 

 

21.14

 

 

23.45

 

Forfeited

 

(61,799)

 

(90,604)

 

 

19.04

 

 

47.46

 

Non-Vested at August 4, 2018

 

940,929

 

1,014,462

 

$

21.79

 

$

18.70

 


(1)

Includes 224,497 shares relinquished for tax payments related to vested DSUs for the six months ended August 4, 2018.

 

As of August 4, 2018, we have unrecognized compensation expense related to non-vested DSUs of $28.6 million, which is expected to be recognized over a weighted-average period of 1.8 years.

 

Stock Options

 

The following table summarizes the activity of stock options for the six months ended August 4, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

Number of

 

Average

 

 

    

Shares

    

Exercise Price

 

Outstanding at February 3, 2018

 

1,527,176

 

$

21.97

 

Granted

 

208,769

 

 

28.53

 

Exercised

 

(144,583)

 

 

22.60

 

Forfeited

 

(44,703)

 

 

14.44

 

Expired

 

(8,087)

 

 

49.18

 

Outstanding at August 4, 2018

 

1,538,572

 

$

22.87

 

Exercisable at August 4, 2018

 

801,720

 

$

27.78

 

 

The weighted-average grant date fair value of the 208,769 stock options granted during the six months ended August 4, 2018 was $10.31 per share. The following table summarizes the weighted-average assumptions used to fair value the stock options at the date of grant using the Black-Scholes option model for the six months ended August 4, 2018:

 

 

 

 

 

 

 

For the Six Months Ended

 

 

 

August 4,

 

 

    

2018

 

Risk-free interest rate

 

2.67%

 

Expected lives

 

5.0 years

 

Dividend yield

 

4.35%

 

Expected volatility

 

56.35%

 

 

As of August 4, 2018, we have unrecognized compensation expense related to non-vested stock options of $3.7 million, which is expected to be recognized over a weighted-average period of 1.5 years.

 

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TAILORED BRANDS, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Cash Settled Awards

 

During 2017, we granted stock-based awards to certain employees, which vest over a period of three years, and will be settled in cash ("cash settled awards").  The fair value of the cash settled awards at each reporting period is based on the price of our common stock and includes a market condition.  The fair value of the cash settled awards will be remeasured at each reporting period until the awards are settled.  Cash settled awards are classified as liabilities in the condensed consolidated balance sheets.  At August 4, 2018, the liability associated with the cash settled awards was $3.2 million with $2.1 million recorded in accrued expenses and other current liabilities and $1.1 million recorded in other liabilities in the condensed consolidated balance sheets.

 

The following table summarizes the activity of cash settled awards for the six months ended August 4, 2018 (in thousands):

 

 

 

 

 

 

 

Cash Settled Awards

Non-Vested at February 3, 2018

 

$

8,353

Granted

 

 

 —

Vested

 

 

(2,613)

Forfeited

 

 

(304)

Non-Vested at August 4, 2018

 

$

5,436

 

As of August 4, 2018, we have unrecognized compensation expense related to non-vested cash settled awards of $3.2 million, which is expected to be recognized over a weighted-average period of 1.4 years.

 

Share-Based Compensation Expense

 

Share-based compensation expense, including cash settled awards, recognized for the three and six months ended August 4, 2018 was $5.5 million and $11.9 million, respectively. Share-based compensation expense recognized for the three and six months ended July 29, 2017 was $4.2 million and $9.0 million, respectively.

   

13.  Goodwill and Other Intangible Assets

 

Goodwill

 

Goodwill allocated to our reportable segments and changes in the net carrying amount of goodwill for the six months ended August 4, 2018 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

    

Retail

    

Apparel

    

Total

 

Balance at February 3, 2018

 

$

94,305

 

 

25,987

 

$

120,292

 

Goodwill of divested business (see Note 2)

 

 

(13,588)

 

 

 —

 

 

(13,588)

 

    Translation adjustment

 

 

(1,042)

 

 

(1,976)

 

 

(3,018)

 

Balance at August 4, 2018

 

$

79,675

 

$

24,011

 

$

103,686

 

 

Goodwill is evaluated for impairment at least annually. A more frequent evaluation is performed if events or circumstances indicate that impairment could have occurred. Such events or circumstances could include, but are not limited to, new significant negative industry or economic trends, unanticipated changes in the competitive environment, decisions to significantly modify or dispose of operations and a significant sustained decline in the market price of our stock. No impairment evaluation was considered necessary during the first six months ended August 4, 2018.

 

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TAILORED BRANDS, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Intangible Assets 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

    

August 4,

    

July 29,

 

February 3,

 

 

    

2018

    

2017

    

2018

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

Carrying amount:

 

 

 

 

 

 

 

 

 

 

Trademarks, tradenames and franchise agreements

 

$

16,055

 

$

16,076

 

$

16,273

 

Favorable leases

 

 

12,876

 

 

13,475

 

 

13,229

 

Customer relationships

 

 

26,415

 

 

26,630

 

 

28,713

 

Total carrying amount

 

 

55,346

 

 

56,181

 

 

58,215

 

Accumulated amortization:

 

 

 

 

 

 

 

 

 

 

Trademarks, tradenames and franchise agreements

 

 

(10,634)

 

 

(10,302)

 

 

(10,558)

 

Favorable leases

 

 

(5,420)

 

 

(4,481)

 

 

(5,010)

 

Customer relationships

 

 

(17,652)

 

 

(15,534)

 

 

(17,992)

 

Total accumulated amortization

 

 

(33,706)

 

 

(30,317)

 

 

(33,560)

 

Total amortizable intangible assets, net

 

 

21,640

 

 

25,864

 

 

24,655

 

Indefinite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

Trademarks and tradename

 

 

144,241

 

 

144,249

 

 

144,332

 

Total intangible assets, net

 

$

165,881

 

$

170,113

 

$

168,987

 

 

Pre-tax amortization expense associated with intangible assets subject to amortization totaled $1.0 million and $2.0 million for the three and six months ended August 4, 2018.  Pre-tax amortization expense associated with intangible assets subject to amortization totaled $1.0 million and $2.1 million for the three and six months ended July 29, 2017, respectively.  Pre-tax amortization associated with intangible assets subject to amortization at August 4, 2018 is estimated to be $1.9 million for the remainder of fiscal 2018, $3.7 million for fiscal 2019, $3.6 million for fiscal 2020, $3.5 million for fiscal 2021 and $2.2 million for fiscal 2022.

 

14.  Fair Value Measurements

 

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

 

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TAILORED BRANDS, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date 

 

 

 

 

 

 

Using

 

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

 

 

 

in Active

 

Significant

 

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

 

 

 

Instruments

 

Inputs

 

Inputs

 

 

 

 

(in thousands)

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

        Total

 

August 4, 2018—

 

 

    

 

 

    

 

 

    

 

 

    

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

$

8,240

 

$

 

$

8,240

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

$

1,932

 

$

 

$

1,932

 

February 3, 2018—

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

$

4,019

 

$

 

$

4,019

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

$

2,307

 

$

 

$

2,307

 

July 29, 2017—

 

 

    

 

 

    

 

 

    

 

 

    

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

$

3  

 

$

 

$

3  

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

$

6,170

 

$

 

$

6,170

 

Derivative financial instruments are comprised of (1) interest rate swap agreements to minimize our exposure to interest rate changes on our outstanding indebtedness, (2) foreign currency forward exchange contracts primarily entered into to minimize our foreign currency exposure related to forecasted purchases of certain inventories denominated in a currency different from the operating entity’s functional currency, (3) foreign currency forward exchange contracts primarily entered into to minimize our foreign currency exposure related to forecasted revenues from our United Kingdom (“UK”) operations denominated in a currency different from the UK’s functional currency and (4) foreign currency forward exchange contracts primarily entered into to minimize our foreign currency exposure related to intercompany loans denominated in a currency different from the operating entity’s functional currency. These derivative financial instruments are recorded in the consolidated balance sheets at fair value based upon observable market inputs, primarily pricing models based on current market rates. Derivative financial instruments in an asset position are included within other current assets or other assets in the consolidated balance sheets. Derivative financial instruments in a liability position are included within accrued expenses and other current liabilities or noncurrent liabilities in the consolidated balance sheets. Please see Note 15 for further information regarding our derivative instruments.

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

 

Long-lived assets, such as property and equipment, goodwill and identifiable intangibles, are periodically evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the asset carrying amount exceeds its fair value, an impairment charge is recognized in the amount by which the carrying amount exceeds the fair value of the asset. 

 

During the six months ended August 4, 2018, we incurred $0.3 million of asset impairment charges, which is included within SG&A expenses in our condensed consolidated statement of earnings, related to underperforming stores. In addition, we recognized a writeoff of $4.0 million of rental product related to the closure of a rental product distribution center, which is included within cost of sales in our condensed consolidated statement of earnings. 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

During the six months ended July 29, 2017, we incurred $2.9 million of asset impairment charges, which is included within SG&A expenses in our condensed consolidated statement of earnings, primarily related to underperforming stores as well as long-lived assets related to our tuxedo rental license agreement with Macy’s. 

 

We estimated the fair value of the long-lived assets based on an income approach using projected future cash flows discounted using a weighted-average cost of capital analysis that reflects current market conditions, which we classify as Level 3 within the fair value hierarchy.

 

Fair Value of Financial Instruments

 

Our financial instruments consist of cash, accounts receivable, accounts payable, accrued expenses and other current liabilities and our Term Loan and Senior Notes.  Management estimates that, as of August 4, 2018, July 29, 2017, and February 3, 2018, the carrying value of our financial instruments, other than our Term Loan and Senior Notes, approximated their fair value due to the highly liquid or short-term nature of these instruments.  We believe that the borrowings under our ABL Facility approximate their fair value because interest rates are adjusted on a short-term basis.

 

The fair values of our Term Loan were valued based upon observable market data provided by a third party for similar types of debt, which we classify as a Level 2 input within the fair value hierarchy.   The fair value of our Senior Notes is based on quoted prices in active markets, which we classify as a Level 1 input within the fair value hierarchy.  The table below shows the fair value and carrying value of our long-term debt, including current portion (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

August 4, 2018

 

July 29, 2017

 

February 3, 2018

 

 

 

Carrying

 

Estimated

 

Carrying

 

Estimated

 

Carrying

 

Estimated

 

 

    

Amount(1)

    

Fair Value

    

Amount(1)

    

Fair Value

    

Amount(1)

    

Fair Value

 

Term Loan and Senior Notes, including current portion

 

$

1,111,877

 

$

1,133,454

 

$

1,541,005

 

$

1,465,502

 

$

1,396,808

 

$

1,407,449

 

 


(1)

The carrying value of the Term Loan and Senior Notes, including current portion is net of deferred financing costs of $7.9 million, $19.0 million and $14.9 million as of August 4, 2018, July 29, 2017 and February 3, 2018, respectively. 

 

 

15.  Derivative Financial Instruments

 

In April 2017, we entered into an interest rate swap agreement on an initial notional amount of $260.0 million that matures in June 2021 with periodic interest settlements. At August 4, 2018, the notional amount totaled $370.0 million. Under this interest rate swap agreement, we receive a floating rate based on 1-month LIBOR and pay a fixed rate of 5.56% (including the applicable margin of 3.50%) on the outstanding notional amount. We have designated the interest rate swap as a cash flow hedge of the variability of interest payments under the Term Loan due to changes in the LIBOR benchmark interest rate.

 

In June 2018, we entered into an interest rate swap agreement on an initial notional amount of $320.0 million that matures in April 2025 with periodic interest settlements. At August 4, 2018, the notional amount totaled $345.0 million. Under this interest rate swap agreement, we receive a floating rate based on 1-month LIBOR and pay a fixed rate of 6.43% (including the applicable margin of 3.50%) on the outstanding notional amount. We have designated the interest rate swap as a cash flow hedge of the variability of interest payments under the Term Loan due to changes in the LIBOR benchmark interest rate.

 

At August 4, 2018, the fair value of the interest rate swaps was a net asset of $5.2 million with $1.5 million recorded in other current assets and $5.4 million recorded in other assets offset by $1.7 million recorded in accrued expenses and other current liabilities in our condensed consolidated balance sheet.  The effective portion of the swaps is reported as a component of accumulated other comprehensive (loss) income.  There was no hedge ineffectiveness at August 4, 2018. Changes in fair value are reclassified from accumulated other comprehensive (loss) income into earnings in the same period that the hedged item affects earnings.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Over the next 12 months, $0.2 million of the effective portion of the interest rate swaps is expected to be reclassified from accumulated other comprehensive (loss) income into earnings within interest expense.  If, at any time, an interest rate swap is determined to be ineffective, in whole or in part, due to changes in the interest rate swap or underlying debt agreements, the fair value of the portion of the interest rate swap determined to be ineffective will be recognized as a gain or loss in the statement of earnings for the applicable period.

 

Also, we have entered into derivative instruments to hedge our foreign exchange risk, specifically related to the British pound and Euro.  At August 4, 2018, the notional amount of the British pound and Euro instruments totaled $27.2 million and $8.0 million, respectively, and mature at various times through December 2019. We have designated these instruments as cash flow hedges of the variability in exchange rates for those foreign currencies.  At August 4, 2018, the fair value of these cash flow hedges was a net asset of $1.2 million with $1.3 million recorded in other current assets offset by $0.1 million recorded in accrued expenses and other current liabilities in our condensed consolidated balance sheet.  The effective portion of the hedges is reported as a component of accumulated other comprehensive (loss) income.  Hedge ineffectiveness at August 4, 2018 was immaterial.  Changes in fair value are reclassified from accumulated other comprehensive (loss) income into earnings in the same period that the hedged item affects earnings. Over the next 12 months, $0.8 million of the effective portion of the cash flow hedges is expected to be reclassified as expense into cost of sales from accumulated other comprehensive (loss) income.

 

In addition, we are exposed to market risk associated with foreign currency exchange rate fluctuations as a result of our direct sourcing programs, specifically related to the Canadian dollar.  As a result, from time to time, we may enter into derivative instruments to hedge this foreign exchange risk.  At August 4, 2018, the notional amount of these instruments totaled $4.6 million. We have not elected to apply hedge accounting to these derivative instruments. Amounts related to these transactions were immaterial to our consolidated financial statements.

 

16.  Segment Reporting

 

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

 

The retail segment includes the results from our four retail merchandising brands: Men's Wearhouse/Men's Wearhouse and Tux, Jos. A. Bank, Moores Clothing for Men ("Moores") and K&G.  These four brands are operating segments that have been aggregated into the retail reportable segment.  Prior to its divestiture, MW Cleaners was also aggregated in the retail segment as its operations did not have a significant effect on our revenues or expenses.  Specialty apparel merchandise offered by our four retail merchandising concepts include suits, suit separates, sport coats, slacks, formalwear, business casual, denim, sportswear, outerwear, dress shirts, shoes and accessories for men. Women's career and casual apparel, sportswear and accessories, including shoes, and children's apparel is offered at most of our K&G stores.  Rental product is offered at our Men's Wearhouse/Men's Wearhouse and Tux, Jos. A. Bank and Moores retail stores.

 

The corporate apparel segment includes the results from our corporate apparel and uniform operations conducted by Dimensions, Alexandra, and Yaffy in the UK and Twin Hill in the U.S., which provide corporate apparel uniforms and workwear to workforces. 

 

We measure segment profitability based on operating income, defined as income before interest expense, interest income, (loss) gain on extinguishment of debt, net and income taxes, before shared service expenses. Shared service expenses include costs incurred and directed primarily by our corporate offices that are not allocated to segments.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Additional net sales information is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

    

August 4, 2018

    

July 29, 2017

    

August 4, 2018

    

July 29, 2017

 

Net sales:

 

 

    

 

 

    

 

 

    

 

 

    

 

Men's Wearhouse(1)

 

$

445,197

 

$

458,751

 

$

893,006

 

$

878,818

 

Jos. A. Bank

 

 

172,427

 

 

174,325

 

 

341,503

 

 

341,553

 

K&G

 

 

83,645

 

 

85,811

 

 

172,925

 

 

174,494

 

Moores

 

 

66,645

 

 

65,312

 

 

112,772

 

 

106,125

 

MW Cleaners(2)

 

 

 —

 

 

8,799

 

 

2,551

 

 

17,313

 

Total retail segment

 

 

767,914

 

 

792,998

 

 

1,522,757

 

 

1,518,303

 

Total corporate apparel segment

 

 

55,516

 

 

57,760

 

 

118,637

 

 

115,361

 

Total net sales

 

$

823,430

 

$

850,758

 

$

1,641,394

 

$

1,633,664

 


(1)

Consists of Men's Wearhouse, Men's Wearhouse and Tux, tuxedo shops within Macy's and Joseph Abboud.

(2)

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

    

August 4, 2018

    

July 29, 2017

    

August 4, 2018

    

July 29, 2017

 

Operating income:

 

 

    

 

 

    

 

 

    

 

 

    

 

Retail

 

$

134,142

 

$

155,221

 

$

232,863

 

$

228,646

 

Corporate apparel

 

 

1,169

 

 

2,103

 

 

2,752

 

 

4,078

 

Shared service expense

 

 

(47,325)

 

 

(48,859)

 

 

(94,732)

 

 

(93,257)

 

Operating income

 

 

87,986

 

 

108,465

 

 

140,883

 

 

139,467

 

Interest income

 

 

122

 

 

98

 

 

207

 

 

165

 

Interest expense

 

 

(20,864)

 

 

(25,167)

 

 

(42,845)

 

 

(50,788)

 

(Loss) gain on extinguishment of debt, net

 

 

(8,122)

 

 

3,281

 

 

(20,833)

 

 

3,996

 

Earnings before income taxes

 

$

59,122

 

$

86,677

 

$

77,412

 

$

92,840

 

 

 

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

17.  Legal Matters

 

On February 17, 2016, Anthony Oliver filed a putative class action lawsuit against our Men's Wearhouse subsidiary in the United States District Court for the Central District of California (Case No. 2:16-cv-01100).  The complaint attempts to allege claims under the Telephone Consumer Protection Act. In particular the complaint alleges that the Company sent unsolicited text messages to cellular telephones beginning October 1, 2013 to the present day. After we demonstrated that the Company had the plaintiff's permission to send him texts, the plaintiff filed an amended complaint alleging the Company sent text messages exceeding the number plaintiff had agreed to receive each week.  The parties filed cross-motions for summary judgment on what constitutes a “week” and the Court recently issued an order granting the plaintiff’s motion and denying our motion on what period constitutes a “week.” On or about August 17, 2018, we entered into a settlement agreement for an immaterial amount consisting of a combination of cash and coupons. The settlement agreement, which is subject to preliminary and final approval of the Court, will not have a material adverse effect on our financial position, results of operations or cash flows. 

On August 2, 2017, two American Airlines employees, Thor Zurbriggen and Dena Catan, filed a putative class action lawsuit against our Twin Hill subsidiary in the United States District Court for the Northern District of Illinois (Case No. 1:17-cv-05648). The complaint attempts to allege claims for strict liability, negligence, and medical monitoring based on allegedly defective uniforms Twin Hill supplied to American Airlines for its employees. On September 28, 2017, the plaintiffs filed an amended complaint adding nine additional named plaintiffs, adding American Airlines, Inc. as a defendant, and adding claims for civil battery and intentional infliction of emotional distress. On November 17, 2017, the Company and American Airlines filed motions to dismiss the plaintiffs’ claims. On September 4, 2018, the Court issued an Order denying our Motion to Dismiss and the matter will proceed in due course. We believe that any lawsuit filed on the basis of the safety of the Twin Hill uniforms supplied to American Airlines is without merit, and we intend to contest this action vigorously. Twin Hill has substantial and convincing evidence of the uniforms' safety and fitness for their intended purpose, and we believe that there is no evidence linking any of the plaintiffs' alleged injuries to our uniforms. The range of loss, if any, is not reasonably estimable at this time. We do not currently believe, however, that it will have a material adverse effect on our financial position, results of operations or cash flows.

On March 29, 2018, Juliette Onody and numerous other American Airlines employees filed a second class action lawsuit against our Twin Hill subsidiary and four related American Airlines entities in the United States District Court for the Northern District of Illinois (Case No. 1:18-cv-02303). The complaint contains the same substantive factual allegations against Twin Hill as the Zurbriggen case noted above and asserts identical claims for battery, intentional infliction of emotional distress, strict liability, negligence, and medical monitoring based on allegedly defective uniforms Twin Hill supplied to American Airlines for its employees. Additionally, the same counsel represents the plaintiffs in both cases. On April 13, 2018, the Company filed an unopposed motion to stay this case in its entirety pending the motions to dismiss in the Zurbriggen case and the Court granted that motion on April 16, 2018. We believe that any lawsuit filed on the basis of the safety of the Twin Hill uniforms supplied to American Airlines is without merit, and we intend to contest this action vigorously. Twin Hill has substantial and convincing evidence of the uniforms' safety and fitness for their intended purpose, and we believe that there is no evidence linking any of the plaintiffs' alleged injuries to our uniforms. The range of loss, if any, is not reasonably estimable at this time. We do not currently believe, however, that it will have a material adverse effect on our financial position, results of operations or cash flows.

On September 27, 2017, Heather Poole and numerous other American Airlines employees filed a lawsuit against our Twin Hill subsidiary in the Superior Court for the State of California for the County of Alameda (Case No. RG17876798).  The complaint attempts to allege claims for strict liability and negligence based on allegedly defective uniforms Twin Hill supplied to American Airlines for its employees. On December 11, 2017, the Company filed a demurrer to Plaintiff’s complaint.  On February 20, 2018, the Court granted our demurrer and dismissed the plaintiffs’ Complaint ruling that the plaintiffs did not allege enough facts to state a claim against Twin Hill. Plaintiffs filed an amended complaint on April 10, 2018 and again on April 27, 2018, which added allegations regarding Plaintiffs’ alleged injuries and named Tailored Brands as a defendant.  On May 10, 2018, Twin Hill removed the case to United States District Court for the Northern District of California (Case No. 3:18-cv-2758).  Plaintiffs filed a motion to remand the case to state court and, on August 20, 2018 the Court issued an Order remanding the case.  Plaintiffs also filed a Third Amended Complaint and Twin Hill

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

and Tailored Brands will have until September 13, 2018 to respond.  We believe that any lawsuit filed on the basis of the safety of the Twin Hill uniforms supplied to American Airlines is without merit, and we intend to contest this action vigorously. Twin Hill has substantial and convincing evidence of the uniforms' safety and fitness for their intended purpose, and we believe that there is no evidence linking any of the plaintiffs' alleged injuries to our uniforms. The range of loss, if any, is not reasonably estimable at this time. We do not currently believe, however, that it will have a material adverse effect on our financial position, results of operations or cash flows.

On October 30, 2017, Melodie Agnello, Denise Mumma, and numerous other American Airlines employees filed a lawsuit against our Twin Hill subsidiary in the Superior Court for the State of California for the County of Alameda (Case No. RG17880635).  The complaint attempts to allege claims for strict liability and negligence based on allegedly defective uniforms Twin Hill supplied to American Airlines for its employees. On December 11, 2017, the Company filed a demurrer to plaintiff’s complaint.  On February 20, 2018, the Court granted our demurrer and dismissed the plaintiffs’ Complaint ruling that the plaintiffs did not allege enough facts to state a claim against Twin Hill. Plaintiffs filed an amended complaint on April 27, 2018, which added allegations regarding Plaintiffs’ alleged injuries and named Tailored Brands as a defendant.  On May 10, 2018, Twin Hill removed the case to United States District Court for the Northern District of California (Case No. 3:18-cv-2756).  Plaintiffs filed a motion to remand the case to state court and, on August 20, 2018 the Court issued an Order remanding the case.  Plaintiffs also filed a Third Amended Complaint and Twin Hill and Tailored Brands will have until September 13, 2018 to respond.  We believe that any lawsuit filed on the basis of the safety of the Twin Hill uniforms supplied to American Airlines is without merit, and we intend to contest this action vigorously. Twin Hill has substantial and convincing evidence of the uniforms' safety and fitness for their intended purpose, and we believe that there is no evidence linking any of the plaintiffs' alleged injuries to our uniforms. The range of loss, if any, is not reasonably estimable at this time. We do not currently believe, however, that it will have a material adverse effect on our financial position, results of operations or cash flows.

On April 27, 2018, Alexandra Hughes, and numerous other American Airlines employees filed a lawsuit against our Twin Hill subsidiary and Tailored Brands in the Superior Court for the State of California for the County of Alameda (Case No. RG18902727).  The complaint attempts to allege claims for strict liability and negligence based on allegedly defective uniforms Twin Hill supplied to American Airlines for its employees.  On May 10, 2018, Twin Hill removed the case to United States District Court for the Northern District of California (Case No. 4:18-cv-2762).  Plaintiffs filed a motion to remand the case to state court, which is scheduled to be heard on August 31, 2018.  Plaintiffs filed a motion to remand the case to state court and, on August 20, 2018 the Court issued an Order remanding the case.  Plaintiffs also filed a Third Amended Complaint and Tailored Brands will have until September 13, 2018 to respond.  We believe that any lawsuit filed on the basis of the safety of the Twin Hill uniforms supplied to American Airlines is without merit, and we intend to contest this action vigorously. Twin Hill has substantial and convincing evidence of the uniforms' safety and fitness for their intended purpose, and we believe that there is no evidence linking any of the plaintiffs' alleged injuries to our uniforms. The range of loss, if any, is not reasonably estimable at this time. We do not currently believe, however, that it will have a material adverse effect on our financial position, results of operations or cash flows.

On April 27, 2018, Rosemary Mackonochie, and numerous other American Airlines employees filed a lawsuit against our Twin Hill subsidiary and Tailored Brands in the Superior Court for the State of California for the County of Alameda (Case No. RG18902720).  The complaint attempts to allege claims for strict liability and negligence based on allegedly defective uniforms Twin Hill supplied to American Airlines for its employees.  On May 10, 2018, Twin Hill removed the case to United States District Court for the Northern District of California (Case No. 4:18-cv-2761).  Plaintiffs filed a motion to remand the case to state court, which is scheduled to be heard on August 31, 2018.  Plaintiffs filed a motion to remand the case to state court and, on August 20, 2018 the Court issued an Order remanding the case.  Plaintiffs also filed a Third Amended Complaint and Twin Hill and Tailored Brands will have until September 13, 2018 to respond.  We believe that any lawsuit filed on the basis of the safety of the Twin Hill uniforms supplied to American Airlines is without merit, and we intend to contest this action vigorously. Twin Hill has substantial and convincing evidence of the uniforms' safety and fitness for their intended purpose, and we believe that there is no evidence linking any of the plaintiffs' alleged injuries to our uniforms. The range of loss, if any, is not reasonably estimable at this time. We do not currently believe, however, that it will have a material adverse effect on our financial position, results of operations or cash flows.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

On August 24, 2018, Lisa Joy and numerous other American Airlines employees filed a third class action lawsuit against our Twin Hill subsidiary and four related American Airlines entities in the United States District Court for the Northern District of Illinois (Case No. 1:18-cv-05808). The complaint contains the same substantive factual allegations against Twin Hill as the Zurbriggen case noted above and asserts identical claims for battery, intentional infliction of emotional distress, strict liability, negligence, and medical monitoring based on allegedly defective uniforms Twin Hill supplied to American Airlines for its employees. Additionally, the same counsel represents the plaintiffs in both cases. On August 31, 2018, the Company filed an unopposed motion to stay this case in its entirety pending the motions to dismiss in the Zurbriggen case and the Court granted that motion on September 11, 2018.  We believe that any lawsuit filed on the basis of the safety of the Twin Hill uniforms supplied to American Airlines is without merit, and we intend to contest this action vigorously. Twin Hill has substantial and convincing evidence of the uniforms' safety and fitness for their intended purpose, and we believe that there is no evidence linking any of the plaintiffs' alleged injuries to our uniforms. The range of loss, if any, is not reasonably estimable at this time. We do not currently believe, however, that it will have a material adverse effect on our financial position, results of operations or cash flows.

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

18.  Condensed Consolidating Information

 

As discussed in Note 5, The Men's Wearhouse (the "Issuer") issued $600.0 million in aggregate principal amount of Senior Notes.  The Senior Notes are guaranteed jointly and severally, on an unsecured basis by Tailored Brands, Inc. (the "Parent") and certain of our U.S. subsidiaries (the "Guarantors").  Our foreign subsidiaries (collectively, the "Non-Guarantors") are not guarantors of the Senior Notes.  Each of the Guarantors is 100% owned and all guarantees are joint and several.  In addition, the guarantees are full and unconditional except for certain automatic release provisions related to the Guarantors.

 

These automatic release provisions are considered customary and include the sale or other disposition of all or substantially all of the assets or all of the capital stock of any subsidiary guarantor, the release or discharge of a guarantor's guarantee of the obligations under the Term Loan other than a release or discharge through payment thereon, the designation in accordance with the Indenture of a guarantor as an unrestricted subsidiary or the satisfaction of the requirements for defeasance or discharge of the Senior Notes as provided for in the Indenture.

 

The tables in the following pages present the condensed consolidating financial information for the Parent, the Issuer, the Guarantors and the Non-Guarantors, together with eliminations, as of and for the periods indicated.  The consolidating financial information may not necessarily be indicative of the financial positions, results of operations or cash flows had the Issuer, Guarantors and Non-Guarantors operated as independent entities.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Tailored Brands, Inc.

Condensed Consolidating Balance Sheet

August 4, 2018

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tailored

 

The Men’s

 

Guarantor

 

Non-Guarantor

 

 

    

 

 

    

 

 

    

Brands, Inc.

    

Wearhouse, Inc.

    

Subsidiaries

    

Subsidiaries

    

Eliminations

    

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 —

 

$

2,086

 

$

2,215

 

$

63,914

 

$

 —

 

$

68,215

 

Accounts receivable, net

 

 

 —

 

 

25,994

 

 

321,918

 

 

50,882

 

 

(333,695)

 

 

65,099

 

Inventories

 

 

 —

 

 

162,588

 

 

434,499

 

 

189,423

 

 

 —

 

 

786,510

 

Other current assets

 

 

3,719

 

 

18,975

 

 

53,284

 

 

11,513

 

 

 —

 

 

87,491

 

Total current assets

 

 

3,719

 

 

209,643

 

 

811,916

 

 

315,732

 

 

(333,695)

 

 

1,007,315

 

Property and equipment, net

 

 

 —

 

 

191,503

 

 

201,939

 

 

33,665

 

 

 —

 

 

427,107

 

Rental product, net

 

 

 —

 

 

91,843

 

 

4,066

 

 

15,436

 

 

 —

 

 

111,345

 

Goodwill

 

 

 —

 

 

6,160

 

 

53,422

 

 

44,104

 

 

 —

 

 

103,686

 

Intangible assets, net

 

 

 —

 

 

 —

 

 

154,580

 

 

11,301

 

 

 —

 

 

165,881

 

Investments in subsidiaries

 

 

141,149

 

 

1,377,602

 

 

 —

 

 

 —

 

 

(1,518,751)

 

 

 —

 

Other assets

 

 

 —

 

 

12,290

 

 

655

 

 

81,087

 

 

(80,535)

 

 

13,497

 

Total assets

 

$

144,868

 

$

1,889,041

 

$

1,226,578

 

$

501,325

 

$

(1,932,981)

 

$

1,828,831

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

126,871

 

$

237,341

 

$

53,847

 

$

61,617

 

$

(333,695)

 

$

145,981

 

Accrued expenses and other current liabilities

 

 

13,049

 

 

146,213

 

 

124,928

 

 

35,788

 

 

 —

 

 

319,978

 

Current portion of long-term debt

 

 

 —

 

 

9,000

 

 

 —

 

 

 —

 

 

 —

 

 

9,000

 

Total current liabilities

 

 

139,920

 

 

392,554

 

 

178,775

 

 

97,405

 

 

(333,695)

 

 

474,959

 

Long-term debt, net

 

 

 —

 

 

1,207,377

 

 

 —

 

 

 —

 

 

 —

 

 

1,207,377

 

Deferred taxes, net and other liabilities

 

 

4,937

 

 

147,961

 

 

47,365

 

 

26,756

 

 

(80,535)

 

 

146,484

 

Shareholders'  equity

 

 

11

 

 

141,149

 

 

1,000,438

 

 

377,164

 

 

(1,518,751)

 

 

11

 

Total liabilities and shareholders'  equity

 

$

144,868

 

$

1,889,041

 

$

1,226,578

 

$

501,325

 

$

(1,932,981)

 

$

1,828,831

 

 

29


 

Table of Contents

TAILORED BRANDS, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Tailored Brands, Inc.

Condensed Consolidating Balance Sheet

July 29, 2017

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tailored

 

The Men’s

 

Guarantor

 

Non-Guarantor

 

 

    

 

 

    

 

 

    

Brands, Inc.

    

Wearhouse, Inc.

    

Subsidiaries

    

Subsidiaries

    

Eliminations

    

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 —

 

$

13,482

 

$

1,924

 

$

97,335

 

$

 —

 

$

112,741

 

Accounts receivable, net

 

 

7,380

 

 

18,103

 

 

430,884

 

 

102,613

 

 

(487,080)

 

 

71,900

 

Inventories

 

 

 —

 

 

186,831

 

 

403,875

 

 

354,077

 

 

 —

 

 

944,783

 

Other current assets

 

 

7,310

 

 

204,477

 

 

26,431

 

 

9,346

 

 

(192,132)

 

 

55,432

 

Total current assets

 

 

14,690

 

 

422,893

 

 

863,114

 

 

563,371

 

 

(679,212)

 

 

1,184,856

 

Property and equipment, net

 

 

 —

 

 

218,122

 

 

204,641

 

 

36,767

 

 

 —

 

 

459,530

 

Rental product, net

 

 

 —

 

 

116,525

 

 

4,894

 

 

17,978

 

 

 —

 

 

139,397

 

Goodwill

 

 

 —

 

 

6,160

 

 

68,510

 

 

45,210

 

 

 —

 

 

119,880

 

Intangible assets, net

 

 

 —

 

 

24

 

 

156,307

 

 

13,782

 

 

 —

 

 

170,113

 

Investments in subsidiaries

 

 

(16,512)

 

 

1,436,555

 

 

 —

 

 

 —

 

 

(1,420,043)

 

 

 —

 

Other assets

 

 

 —

 

 

4,790

 

 

897

 

 

6,861

 

 

(6,600)

 

 

5,948

 

Total assets

 

$

(1,822)

 

$

2,205,069

 

$

1,298,363

 

$

683,969

 

$

(2,105,855)

 

$

2,079,724

 

LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

26,528

 

$

480,565

 

$

60,420

 

$

59,723

 

$

(487,080)

 

$

140,156

 

Accrued expenses and other current liabilities

 

 

17,967

 

 

119,314

 

 

113,058

 

 

217,443

 

 

(184,856)

 

 

282,926

 

Current portion of long-term debt

 

 

 —

 

 

8,750

 

 

 —

 

 

 —

 

 

 —

 

 

8,750

 

Total current liabilities

 

 

44,495

 

 

608,629

 

 

173,478

 

 

277,166

 

 

(671,936)

 

 

431,832

 

Long-term debt, net

 

 

 —

 

 

1,532,255

 

 

 —

 

 

 —

 

 

 —

 

 

1,532,255

 

Deferred taxes, net and other liabilities

 

 

359

 

 

80,697

 

 

84,509

 

 

10,624

 

 

(13,876)

 

 

162,313

 

Shareholders' (deficit) equity

 

 

(46,676)

 

 

(16,512)

 

 

1,040,376

 

 

396,179

 

 

(1,420,043)

 

 

(46,676)

 

Total liabilities and shareholders' (deficit) equity

 

$

(1,822)

 

$

2,205,069

 

$

1,298,363

 

$

683,969

 

$

(2,105,855)

 

$

2,079,724

 

 

30


 

Table of Contents

TAILORED BRANDS, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Tailored Brands, Inc.

Condensed Consolidating Balance Sheet

February 3, 2018

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tailored

 

The Men’s

 

Guarantor

 

Non-Guarantor

 

 

    

 

 

    

 

 

    

Brands, Inc.

    

Wearhouse, Inc.

    

Subsidiaries

    

Subsidiaries

    

Eliminations

    

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 —

 

$

51,818

 

$

2,180

 

$

49,609

 

$

 —

 

$

103,607

 

Accounts receivable, net

 

 

 —

 

 

23,712

 

 

368,328

 

 

58,573

 

 

(370,830)

 

 

79,783

 

Inventories

 

 

 —

 

 

207,504

 

 

445,126

 

 

199,301

 

 

 —

 

 

851,931

 

Other current assets

 

 

3,666

 

 

26,951

 

 

38,217

 

 

9,418

 

 

 —

 

 

78,252

 

Total current assets

 

 

3,666

 

 

309,985

 

 

853,851

 

 

316,901

 

 

(370,830)

 

 

1,113,573

 

Property and equipment, net

 

 

 —

 

 

203,204

 

 

220,979

 

 

36,491

 

 

 —

 

 

460,674

 

Rental product, net

 

 

 —

 

 

103,664

 

 

3,658

 

 

16,408

 

 

 —

 

 

123,730

 

Goodwill

 

 

 —

 

 

6,160

 

 

67,010

 

 

47,122

 

 

 —

 

 

120,292

 

Intangible assets, net

 

 

 —

 

 

 —

 

 

155,438

 

 

13,549

 

 

 —

 

 

168,987

 

Investments in subsidiaries

 

 

128,458

 

 

1,424,647

 

 

 —

 

 

 —

 

 

(1,553,105)

 

 

 —

 

Other assets

 

 

 —

 

 

11,183

 

 

805

 

 

81,846

 

 

(81,135)

 

 

12,699

 

Total assets

 

$

132,124

 

$

2,058,843

 

$

1,301,741

 

$

512,317

 

$

(2,005,070)

 

$

1,999,955

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

110,326

 

$

281,838

 

$

57,756

 

$

66,016

 

$

(370,830)

 

$

145,106

 

Accrued expenses and other current liabilities

 

 

14,061

 

 

87,597

 

 

155,813

 

 

34,187

 

 

 —

 

 

291,658

 

Current portion of long-term debt

 

 

 —

 

 

7,000

 

 

 —

 

 

 —

 

 

 —

 

 

7,000

 

Total current liabilities

 

 

124,387

 

 

376,435

 

 

213,569

 

 

100,203

 

 

(370,830)

 

 

443,764

 

Long-term debt, net

 

 

 —

 

 

1,389,808

 

 

 —

 

 

 —

 

 

 —

 

 

1,389,808

 

Deferred taxes, net and other liabilities

 

 

5,545

 

 

164,142

 

 

46,641

 

 

28,998

 

 

(81,135)

 

 

164,191

 

Shareholders' equity

 

 

2,192

 

 

128,458

 

 

1,041,531

 

 

383,116

 

 

(1,553,105)

 

 

2,192

 

Total liabilities and shareholders' equity

 

$

132,124

 

$

2,058,843

 

$

1,301,741

 

$

512,317

 

$

(2,005,070)

 

$

1,999,955

 

 

31


 

Table of Contents

TAILORED BRANDS, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Tailored Brands, Inc.

Condensed Consolidating Statement of Earnings (Loss)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tailored

 

The Men’s

 

Guarantor

 

Non-Guarantor

 

 

    

 

 

    

 

 

    

Brands, Inc.

    

Wearhouse, Inc.

    

Subsidiaries

    

Subsidiaries

    

Eliminations

    

Consolidated

 

Three Months Ended August 4, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 —

 

$

443,685

 

$

386,319

 

 

164,525

 

$

(171,099)

 

$

823,430

 

Cost of sales

 

 

 —

 

 

220,210

 

 

288,057

 

 

117,360

 

 

(171,099)

 

 

454,528

 

Gross margin

 

 

 —

 

 

223,475

 

 

98,262

 

 

47,165

 

 

 —

 

 

368,902

 

Operating expenses

 

 

1,083

 

 

132,573

 

 

132,681

 

 

29,064

 

 

(14,485)

 

 

280,916

 

Operating (loss) income

 

 

(1,083)

 

 

90,902

 

 

(34,419)

 

 

18,101

 

 

14,485

 

 

87,986

 

Other income and expenses, net

 

 

 —

 

 

 —

 

 

14,485

 

 

 —

 

 

(14,485)

 

 

 —

 

Interest expense, net

 

 

(923)

 

 

(22,458)

 

 

2,131

 

 

508

 

 

 —

 

 

(20,742)

 

Loss on extinguishment of debt, net

 

 

 —

 

 

(8,122)

 

 

 —

 

 

 —

 

 

 —

 

 

(8,122)

 

(Loss) earnings before income taxes

 

 

(2,006)

 

 

60,322

 

 

(17,803)

 

 

18,609

 

 

 —

 

 

59,122

 

(Benefit) provision for income taxes

 

 

(461)

 

 

9,505

 

 

(2,557)

 

 

3,397

 

 

 —

 

 

9,884

 

(Loss) earnings before equity in net income of subsidiaries

 

 

(1,545)

 

 

50,817

 

 

(15,246)

 

 

15,212

 

 

 —

 

 

49,238

 

Equity in earnings (loss) of subsidiaries

 

 

50,783

 

 

(34)

 

 

 —

 

 

 —

 

 

(50,749)

 

 

 —

 

Net earnings (loss)

 

$

49,238

 

$

50,783

 

$

(15,246)

 

$

15,212

 

$

(50,749)

 

$

49,238

 

Comprehensive income (loss)

 

$

42,583

 

$

50,681

 

$

(15,246)

 

$

8,659

 

$

(44,094)

 

$

42,583

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended July 29, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 —

 

$

457,870

 

$

369,476

 

$

135,125

 

$

(111,713)

 

$

850,758

 

Cost of sales

 

 

 —

 

 

208,789

 

 

265,051

 

 

91,935

 

 

(111,713)

 

 

454,062

 

Gross margin

 

 

 —

 

 

249,081

 

 

104,425

 

 

43,190

 

 

 —

 

 

396,696

 

Operating expenses

 

 

779

 

 

134,389

 

 

138,023

 

 

28,904

 

 

(13,864)

 

 

288,231

 

Operating (loss) income

 

 

(779)

 

 

114,692

 

 

(33,598)

 

 

14,286

 

 

13,864

 

 

108,465

 

Other income and expenses, net

 

 

 —

 

 

 —

 

 

14,138

 

 

(274)

 

 

(13,864)

 

 

 —

 

Interest expense, net

 

 

242

 

 

(25,329)

 

 

1,703

 

 

(1,685)

 

 

 —

 

 

(25,069)

 

Gain on extinguishment of debt, net

 

 

 —

 

 

3,281

 

 

 —

 

 

 —

 

 

 —

 

 

3,281

 

(Loss) earnings before income taxes

 

 

(537)

 

 

92,644

 

 

(17,757)

 

 

12,327

 

 

 —

 

 

86,677

 

(Benefit) provision for income taxes

 

 

(167)

 

 

30,215

 

 

(6,205)

 

 

4,363

 

 

 —

 

 

28,206

 

(Loss) earnings before equity in net income of subsidiaries

 

 

(370)

 

 

62,429

 

 

(11,552)

 

 

7,964

 

 

 —

 

 

58,471

 

Equity in earnings (loss) of subsidiaries

 

 

58,841

 

 

(3,588)

 

 

 —

 

 

 —

 

 

(55,253)

 

 

 —

 

Net earnings (loss)

 

$

58,471

 

$

58,841

 

$

(11,552)

 

$

7,964

 

$

(55,253)

 

$

58,471

 

Comprehensive income (loss)

 

$

72,498

 

$

58,544

 

$

(11,552)

 

$

22,288

 

$

(69,280)

 

$

72,498

 

32


 

Table of Contents

TAILORED BRANDS, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tailored

 

The Men’s

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

 

 

 

    

Brands, Inc.

 

Wearhouse, Inc.

    

Subsidiaries

    

Subsidiaries

    

Eliminations

    

Consolidated

 

Six Months Ended August 4, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 —

 

$

889,932

 

$

767,740

 

$

292,192

 

$

(308,470)

 

$

1,641,394

 

Cost of sales

 

 

 —

 

 

445,183

 

 

579,000

 

 

211,555

 

 

(308,470)

 

 

927,268

 

Gross margin

 

 

 —

 

 

444,749

 

 

188,740

 

 

80,637

 

 

 —

 

 

714,126

 

Operating expenses

 

 

1,965

 

 

269,846

 

 

271,076

 

 

57,507

 

 

(27,151)

 

 

573,243

 

Operating (loss) income

 

 

(1,965)

 

 

174,903

 

 

(82,336)

 

 

23,130

 

 

27,151

 

 

140,883

 

Other income and expenses, net

 

 

 —

 

 

 —

 

 

27,151

 

 

 —

 

 

(27,151)

 

 

 —

 

Interest expense, net

 

 

(1,687)

 

 

(46,124)

 

 

4,145

 

 

1,028

 

 

 —

 

 

(42,638)

 

Loss on extinguishment of debt, net

 

 

 —

 

 

(20,833)

 

 

 —

 

 

 —

 

 

 —

 

 

(20,833)

 

(Loss) earnings before income taxes

 

 

(3,652)

 

 

107,946

 

 

(51,040)

 

 

24,158

 

 

 —

 

 

77,412

 

(Benefit) provision for income taxes

 

 

(1,119)

 

 

20,578

 

 

(10,568)

 

 

5,374

 

 

 —

 

 

14,265

 

(Loss) earnings before equity in net income of subsidiaries

 

 

(2,533)

 

 

87,368

 

 

(40,472)

 

 

18,784

 

 

 —

 

 

63,147

 

Equity in earnings (loss) of subsidiaries

 

 

65,680

 

 

(21,688)

 

 

 —

 

 

 —

 

 

(43,992)

 

 

 —

 

Net earnings (loss)

 

$

63,147

 

$

65,680

 

$

(40,472)

 

$

18,784

 

$

(43,992)

 

$

63,147

 

Comprehensive income (loss)

 

$

45,149

 

$

66,772

 

$

(40,472)

 

$

(306)

 

$

(25,994)

 

$

45,149

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended July 29, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 —

 

$

876,795

 

$

741,740

 

$

270,383

 

$

(255,254)

 

$

1,633,664

 

Cost of sales

 

 

 —

 

 

421,288

 

 

543,682

 

 

194,812

 

 

(255,254)

 

 

904,528

 

Gross margin

 

 

 —

 

 

455,507

 

 

198,058

 

 

75,571

 

 

 —

 

 

729,136

 

Operating expenses

 

 

1,682

 

 

290,172

 

 

271,555

 

 

54,856

 

 

(28,596)

 

 

589,669

 

Operating (loss) income

 

 

(1,682)

 

 

165,335

 

 

(73,497)

 

 

20,715

 

 

28,596

 

 

139,467

 

Other income and expenses, net

 

 

 —

 

 

 —

 

 

28,870

 

 

(274)

 

 

(28,596)

 

 

 —

 

Interest expense, net

 

 

352

 

 

(51,221)

 

 

3,261

 

 

(3,015)

 

 

 —

 

 

(50,623)

 

Gain on extinguishment of debt, net

 

 

 —

 

 

3,996

 

 

 —

 

 

 —

 

 

 —

 

 

3,996

 

(Loss) earnings before income taxes

 

 

(1,330)

 

 

118,110

 

 

(41,366)

 

 

17,426

 

 

 —

 

 

92,840

 

Provision (benefit) for income taxes

 

 

1,778

 

 

38,684

 

 

(13,957)

 

 

6,025

 

 

 —

 

 

32,530

 

(Loss) earnings before equity in net income of subsidiaries

 

 

(3,108)

 

 

79,426

 

 

(27,409)

 

 

11,401

 

 

 —

 

 

60,310

 

Equity in earnings (loss) of subsidiaries

 

 

63,418

 

 

(16,008)

 

 

 —

 

 

 —

 

 

(47,410)

 

 

 —

 

Net earnings (loss)

 

$

60,310

 

$

63,418

 

$

(27,409)

 

$

11,401

 

$

(47,410)

 

$

60,310

 

Comprehensive income (loss)

 

$

72,212

 

$

61,464

 

$

(27,409)

 

$

25,257

 

$

(59,312)

 

$

72,212

 

33


 

Table of Contents

TAILORED BRANDS, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Tailored Brands, Inc.

Condensed Consolidating Statement of Cash Flows

For the Six Months Ended August 4, 2018

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tailored

 

The Men’s

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

 

    

Brands, Inc.

    

Wearhouse, Inc.

    

Subsidiaries

    

Subsidiaries

    

Eliminations

    

Consolidated

 

Net cash provided by (used in) operating activities

 

$

21,132

 

$

320,774

 

$

(2,235)

 

$

(122,936)

 

$

(18,744)

 

$

197,991

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

 —

 

 

(6,058)

 

 

(15,485)

 

 

(3,102)

 

 

 —

 

 

(24,645)

 

Proceeds from divestiture of business

 

 

 —

 

 

 —

 

 

17,755

 

 

 —

 

 

 —

 

 

17,755

 

Intercompany activities

 

 

 —

 

 

(142,775)

 

 

 —

 

 

 —

 

 

142,775

 

 

 —

 

Net cash (used in) provided by investing activities

 

 

 —

 

 

(148,833)

 

 

2,270

 

 

(3,102)

 

 

142,775

 

 

(6,890)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments on original term loan

 

 

 —

 

 

(993,420)

 

 

 —

 

 

 —

 

 

 —

 

 

(993,420)

 

Proceeds from new term loan

 

 

 —

 

 

895,500

 

 

 —

 

 

 —

 

 

 —

 

 

895,500

 

Payments on new term loan

 

 

 —

 

 

(4,500)

 

 

 —

 

 

 —

 

 

 —

 

 

(4,500)

 

Proceeds from asset-based revolving credit facility

 

 

 —

 

 

199,500

 

 

 —

 

 

 —

 

 

 —

 

 

199,500

 

Payments on asset-based revolving credit facility

 

 

 —

 

 

(95,000)

 

 

 —

 

 

 —

 

 

 —

 

 

(95,000)

 

Repurchase and retirement of senior notes

 

 

 —

 

 

(199,365)

 

 

 —

 

 

 —

 

 

 —

 

 

(199,365)

 

Deferred financing costs

 

 

 —

 

 

(5,644)

 

 

 —

 

 

 —

 

 

 —

 

 

(5,644)

 

Intercompany activities

 

 

 —

 

 

(18,744)

 

 

 —

 

 

142,775

 

 

(124,031)

 

 

 —

 

Cash dividends paid

 

 

(18,744)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(18,744)

 

Proceeds from issuance of common stock

 

 

4,113

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

4,113

 

Tax payments related to vested deferred stock units

 

 

(6,501)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(6,501)

 

Net cash (used in) provided by financing activities

 

 

(21,132)

 

 

(221,673)

 

 

 —

 

 

142,775

 

 

(124,031)

 

 

(224,061)

 

Effect of exchange rate changes

 

 

 —

 

 

 —

 

 

 —

 

 

(2,432)

 

 

 —

 

 

(2,432)

 

(Decrease) increase in cash and cash equivalents

 

 

 —

 

 

(49,732)

 

 

35

 

 

14,305

 

 

 —

 

 

(35,392)

 

Cash and cash equivalents at beginning of period

 

 

 —

 

 

51,818

 

 

2,180

 

 

49,609

 

 

 —

 

 

103,607

 

Cash and cash equivalents at end of period

 

$

 —

 

$

2,086

 

$

2,215

 

$

63,914

 

$

 —

 

$

68,215

 

 

34


 

Table of Contents

TAILORED BRANDS, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Tailored Brands, Inc.

Condensed Consolidating Statement of Cash Flows

For the Six Months Ended July 29, 2017

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tailored

 

The Men’s

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

 

 

 

    

Brands, Inc.

    

Wearhouse, Inc.

    

Subsidiaries

    

Subsidiaries

    

Eliminations

    

Consolidated

 

Net cash provided by (used in) operating activities

 

$

18,750

 

$

288,017

 

$

17,196

 

$

(165,401)

 

$

(18,033)

 

$

140,529

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

 —

 

 

(11,384)

 

 

(19,310)

 

 

(3,279)

 

 

 —

 

 

(33,973)

 

Acquisition of business, net of cash

 

 

 —

 

 

 —

 

 

 —

 

 

(457)

 

 

 —

 

 

(457)

 

Intercompany activities

 

 

 —

 

 

(192,824)

 

 

 —

 

 

 —

 

 

192,824

 

 

 —

 

Proceeds from sale of property and equipment

 

 

 —

 

 

 —

 

 

2,157

 

 

 —

 

 

 —

 

 

2,157

 

Net cash used in investing activities

 

 

 —

 

 

(204,208)

 

 

(17,153)

 

 

(3,736)

 

 

192,824

 

 

(32,273)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments on original term loan

 

 

 —

 

 

(8,129)

 

 

 —

 

 

 —

 

 

 —

 

 

(8,129)

 

Proceeds from asset-based revolving credit facility

 

 

 —

 

 

181,550

 

 

 —

 

 

 —

 

 

 —

 

 

181,550

 

Payments on asset-based revolving credit facility

 

 

 —

 

 

(181,550)

 

 

 —

 

 

 —

 

 

 —

 

 

(181,550)

 

Repurchase and retirement of senior notes

 

 

 —

 

 

(45,167)

 

 

 —

 

 

 —

 

 

 —

 

 

(45,167)

 

Intercompany activities

 

 

 —

 

 

(18,033)

 

 

 —

 

 

192,824

 

 

(174,791)

 

 

 —

 

Cash dividends paid

 

 

(18,033)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(18,033)

 

Proceeds from issuance of common stock

 

 

927

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

927

 

Tax payments related to vested deferred stock units

 

 

(1,644)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,644)

 

Net cash (used in) provided by financing activities

 

 

(18,750)

 

 

(71,329)

 

 

 —

 

 

192,824

 

 

(174,791)

 

 

(72,046)

 

Effect of exchange rate changes

 

 

 —

 

 

 —

 

 

 —

 

 

5,642

 

 

 —

 

 

5,642

 

Increase in cash and cash equivalents

 

 

 —

 

 

12,480

 

 

43

 

 

29,329

 

 

 —

 

 

41,852

 

Cash and cash equivalents at beginning of period

 

 

 —

 

 

1,002

 

 

1,881

 

 

68,006

 

 

 —

 

 

70,889

 

Cash and cash equivalents at end of period

 

$

 —

 

$

13,482

 

$

1,924

 

$

97,335

 

$

 —

 

$

112,741

 

 

 

 

 

35


 

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

We encourage you to read this "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") in conjunction with the corresponding section included in our Annual Report on Form 10-K for the year ended February 3, 2018.  References herein to years are to our 52-week or 53-week fiscal year, which ends on the Saturday nearest January 31 in the following calendar year.  For example, references to "2018" mean the 52-week fiscal year ending February 2, 2019.

 

Executive Overview

 

Background

 

We are the leading specialty retailer of men’s tailored clothing and the largest men’s formalwear provider in the United States (“U.S.”) and Canada and help men dress for work and special occasions.  We serve our customers through an expansive omni-channel network that includes over 1,400 stores in the U.S. and Canada as well as our branded e-commerce websites at www.menswearhouse.com, www.josbank.com, and www.josephabboud.com.

On February 28, 2018, we entered into a definitive agreement to divest our MW Cleaners business for approximately $18.0 million, subject to certain adjustments, and the transaction closed on March 3, 2018.  Please see Note 2 to the condensed consolidated financial statements for additional information.

 

Our operations are conducted in two reportable segments, retail and corporate apparel, based on the way we manage, evaluate and internally report our business activities.  Please see Note 16 of Notes to Condensed Consolidated Financial Statements and the discussion included in "Results of Operations" below for additional information and disclosures regarding our reportable segments.

 

Second Quarter Discussion

 

During the second quarter of 2018, we executed well on our initiatives including growing our custom business and on increasing transactions through brand marketing campaigns and enhanced omni-channel initiatives resulting in positive comparable sales for all of our retail brands.  In addition, we continued to make progress on moving to a leaner, more efficient inventory model, which is particularly important as custom clothing becomes a larger percentage of our mix.  With leaner inventories, we can improve the customer experience and free-up working capital.

 

In addition, during the second quarter of 2018, we continued to strengthen our balance sheet by completing a $175.0 million partial redemption of our Senior Notes and our total debt has decreased $324.6 million compared to the end of the second quarter of 2017. 

 

Key operating metrics for the quarter ended August 4, 2018 include:

 

·

Net sales decreased 3.2% primarily due to the calendar shift caused by last year’s 53rd week that more than offset an increase in retail segment comparable sales.

·

Comparable sales increased 1.0% at Men’s Wearhouse, 2.0% at Jos. A. Bank, 3.5% at K&G and 3.7% at Moores. Overall, comparable sales for our retail segment increased 1.7%.

·

Operating income was $88.0 million for the second quarter of 2018 compared to operating income of $108.5 million in the second quarter of 2017.

·

Diluted earnings per share were $0.97 for the second quarter of 2018 compared to diluted earnings per share of $1.19 in the second quarter of 2017.

 

Key liquidity metrics for the six months ended August 4, 2018 include:

 

·

Cash and cash equivalents at the end of the second quarter of 2018 were $68.2 million, a decrease of $44.5 million compared to the end of the second quarter of 2017 primarily due to the use of cash on hand to fund a portion of the partial redemption of $175.0 million in face value of our Senior Notes during the second quarter of 2018.

·

Cash provided by operating activities was $198.0 million for the first six months of 2018 compared to $140.5 million for the first six months of 2017.

·

Capital expenditures were $24.6 million for the first six months of 2018 compared to $34.0 million for the first six months of 2017.

36


 

·

We repaid $97.9 million on our term loan, repurchased and retired $192.6 million in face value of Senior Notes and have $104.5 million of borrowings outstanding on our revolving credit facility as of August 4, 2018.

·

Dividends paid totaled $18.7 million for the first six months of 2018.

 

Leadership Transition Discussion

 

On August 28, 2018, we reported that Douglas S. Ewert has announced his intention to retire as Chief Executive Officer (“CEO”) and as a member of our Board of Directors (the “Board”), effective September 30, 2018. Dinesh Lathi, Non-Executive Chairman of the Board, has been appointed Executive Chairman, effective immediately. In light of Mr. Lathi’s new role, the Board appointed Theo Killion as lead independent director. To ensure an orderly transition, Mr. Ewert will serve as a strategic advisor until the end of the calendar year. The Board will initiate a comprehensive search process to identify a successor CEO.

 

We also announced that Bruce Thorn resigned from his position as President and Chief Operating Officer, effective August 31, 2018. Mr. Thorn informed us that he is resigning to pursue another opportunity.

 

Items Affecting Comparability of Results

 

The following table depicts the effect on pretax income for certain items that have impacted the comparability of our results in 2018 and 2017 (dollars in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

 

August 4,

 

July 29,

 

August 4,

 

July 29,

 

 

    

2018

    

2017

    

2018

    

2017

 

Loss on extinguishment of debt (1)

 

$

8.1

 

$

 —

 

$

20.0

 

$

 —

 

Closure of rental product distribution center (2)

 

 

4.4

 

 

 —

 

 

4.4

 

 

 —

 

Loss on divestiture of MW Cleaners (3)

 

 

0.2

 

 

 —

 

 

3.8

 

 

 —

 

Costs to terminate Macy's agreement (4)

 

 

 —

 

 

 —

 

 

 —

 

 

17.2

 

Total (5)

 

$

12.7

 

$

 —

 

$

28.2

 

$

17.2

 


(1)

For the three months ended August 4, 2018, consists of $8.1 million related to the partial redemption of our Senior Notes.  For the six months ended August 4, 2018, consists of $11.9 million related to the refinancing of our Term Loan and $8.1 million related to the partial redemption of our Senior Notes.  Please see Note 5 to the condensed consolidated financial statements for additional information.

(2)

Consists of $4.0 million of rental product writeoffs, $0.2 million of accelerated depreciation and $0.2 million of severance costs.

(3)

Please see Note 2 to the condensed consolidated financial statements for additional information.

(4)

Please see Note 3 to the condensed consolidated financial statements for additional information.

(5)

For the three months ended August 4, 2018, $4.0 million is included in cost of sales, $0.6 million is included in selling, general and administrative expenses, ("SG&A") and $8.1 million is included in loss on extinguishment of debt.  For the six months ended August 4, 2018, $4.0 million in cost of sales, $4.2 million is included in SG&A and $20.0 million is included in loss on extinguishment of debt. For the six months ended July 29, 2017, $1.4 million is included in cost of sales and $15.8 million is included in SG&A.

 

37


 

Store Data

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

For the Year Ended

 

 

 

August 4,

 

July 29,

 

August 4,

 

July 29,

 

February 3,

 

 

     

2018

    

2017

    

2018

    

2017

    

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Open at beginning of period:

 

1,476

 

1,663

 

1,477

 

1,667

 

1,667

 

Opened

 

 —

 

 1

 

 1

 

 2

 

 4

 

Closed (1)

 

(7)

 

(180)

 

(9)

 

(185)

 

(194)

 

Open at end of the period

 

1,469

 

1,484

 

1,469

 

1,484

 

1,477

 

 

 

 

 

 

 

 

 

 

 

 

 

Men’s Wearhouse(2) 

 

719

 

718

 

719

 

718

 

719

 

Men’s Wearhouse and Tux

 

49

 

54

 

49

 

54

 

51

 

Jos. A. Bank (3)

 

487

 

496

 

487

 

496

 

491

 

Moores

 

126

 

126

 

126

 

126

 

126

 

K&G

 

88

 

90

 

88

 

90

 

90

 

 

 

1,469

 

1,484

 

1,469

 

1,484

 

1,477

 


(1)

All 170 tuxedo shops within Macy's stores were closed during the second quarter of 2017.

(2)

Includes one Joseph Abboud store.

(3)

Excludes franchise stores.

 

During the second quarter of 2018, we closed seven stores (four Jos. A. Bank stores, one Men’s Wearhouse store, one Men's Wearhouse and Tux store, and one K&G store).

 

Seasonality

 

Our sales and net earnings are subject to seasonal fluctuations and may vary by brand. Typically, our rental product revenues are heavily concentrated in the second and third quarters (prom and wedding season) while the fourth quarter is the seasonal low point.  With respect to corporate apparel sales and operating results, seasonal fluctuations are not significant but the acquisition of new customers or existing customer decisions to rebrand or revise their corporate wear programs can cause significant variations in period results. Because of these fluctuations, results for any quarter are not necessarily indicative of the results that may be achieved for the full year.

38


 

Results of Operations

 

For the Three Months Ended August 4, 2018 Compared to the Three Months Ended July 29, 2017

 

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

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended(1)

 

 

 

 

August 4,

 

July 29,

 

 

 

    

2018

    

2017

 

 

Net sales:

 

 

 

 

 

 

Retail clothing product

 

73.6

%  

69.9

%  

 

Rental services

 

15.2

 

17.9

 

 

Alteration and other services

 

4.5

 

5.4

 

 

Total retail sales

 

93.3

 

93.2

 

 

Corporate apparel clothing product

 

6.7

 

6.8

 

 

Total net sales

 

100.0

%  

100.0

%  

 

Cost of sales(2):

 

 

 

 

 

 

Retail clothing product

 

42.8

 

41.8

 

 

Rental services

 

15.5

 

15.8

 

 

Alteration and other services

 

91.1

 

76.2

 

 

Occupancy costs

 

13.3

 

13.0

 

 

Total retail cost of sales

 

53.9

 

51.8

 

 

Corporate apparel clothing product

 

73.2

 

74.6

 

 

Total cost of sales

 

55.2

 

53.4

 

 

Gross margin(2):

 

 

 

 

 

 

Retail clothing product

 

57.2

 

58.2

 

 

Rental services

 

84.5

 

84.2

 

 

Alteration and other services

 

8.9

 

23.8

 

 

Occupancy costs

 

(13.3)

 

(13.0)

 

 

Total retail gross margin

 

46.1

 

48.2

 

 

Corporate apparel clothing product

 

26.8

 

25.4

 

 

Total gross margin

 

44.8

 

46.6

 

 

Advertising expense

 

4.7

 

4.7

 

 

Selling, general and administrative expenses

 

29.4

 

29.2

 

 

Operating income

 

10.7

 

12.7

 

 

Interest income

 

0.0

 

0.0

 

 

Interest expense

 

(2.5)

 

(3.0)

 

 

(Loss) gain on extinguishment of debt, net

 

(1.0)

 

0.4

 

 

Earnings before income taxes

 

7.2

 

10.2

 

 

Provision for income taxes

 

1.2

 

3.3

 

 

Net earnings

 

6.0

%  

6.9

%  

 


(1)

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

(2)

Calculated as a percentage of related sales.

39


 

Net Sales

 

Total net sales decreased $27.3 million, or 3.2%, to $823.4 million for the second quarter of 2018 as compared to the second quarter of 2017.

 

Total retail sales decreased $25.1 million, or 3.2%, to $767.9 million for the second quarter of 2018 as compared to the second quarter of 2017 primarily due to a $26.9 million decrease in rental service revenues primarily due to the 53-week to 52-week calendar shift and an earlier prom season as well as a $9.0 million decrease in alteration and other services revenues primarily reflecting the impact of our divestiture of MW Cleaners.  These decreases were partially offset by a $10.8 million increase in retail clothing product sales, driven by an increase in comparable sales at all of our retail brands.  The decrease in total retail sales is further described below:

 

 

 

 

 

(in millions)

    

Amount Attributed to

$

4.2

 

1.0% increase in comparable sales at Men's Wearhouse.

 

3.1

 

2.0% increase in comparable sales at Jos. A. Bank.

 

2.6

 

3.5% increase in comparable sales at K&G.

 

2.3

 

3.7% increase in comparable sales at Moores(1).

 

(32.4)

 

Decrease in non-comparable sales (primarily due to calendar shift of 53rd week).

 

1.0

 

Increase in net sales resulting from change in U.S./Canadian dollar exchange rate.

 

(5.9)

 

Other (primarily resulting from divestiture of MW Cleaners).

$

(25.1)

 

Decrease in total retail sales.


(1)

Comparable sales percentages for Moores are calculated using Canadian dollars.

 

Comparable sales is defined as net sales from stores open at least twelve months at period end, excluding stores where the square footage has changed by more than 25% within the past year, and includes e-commerce sales. Due to the 53-week to 52-week calendar shift, comparable sales for the second quarter of 2018 are compared with the 13-week period ended August 5, 2017.  We operate our business using an omni-channel approach and do not differentiate e-commerce sales from our other channels.

 

The increase in comparable sales at Men's Wearhouse resulted primarily from an increase in transactions for clothing and a slight increase in average unit retail (net selling prices), partially offset by a decrease in units per transaction. Rental service comparable sales at Men’s Wearhouse decreased 11.5% primarily reflecting the impact of the 53-week to 52-week calendar shift, an earlier prom season and a shift in demand for weddings to the third quarter. The increase at Jos. A. Bank resulted primarily from an increase in transactions, partially offset by a slight decrease in units per transaction, while average unit retail was flat. The increase at K&G resulted primarily from an increase in units per transaction and average unit retail partially offset by a slight decrease in transactions. The increase at Moores resulted primarily from increases in both transactions and average unit retail, while units per transaction were flat. 

 

Total corporate apparel clothing product sales decreased $2.2 million for the second quarter of 2018 as compared to the second quarter of 2017 primarily due to lower sales in the United Kingdom (“UK”) partially offset by the impact of a stronger British pound this year compared to last year of approximately $1.2 million. 

 

Gross Margin

 

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

 

Our total gross margin decreased $27.8 million, or 7.0%, to $368.9 million in the second quarter of 2018 as compared to the second quarter of 2017 primarily as a result of lower rental services revenue.  Total retail segment gross margin decreased $28.0 million in the second quarter of 2018 compared to same period last year primarily due to the decrease in sales and the writeoff of $4.0 million of rental product related to the closure of a rental product distribution center. 

 

For the retail segment, total gross margin as a percentage of related sales decreased to 46.1% in the second quarter of 2018 from 48.2% in the second quarter of 2017.  The decrease in retail segment gross margin was primarily due to the decrease in rental services revenue and deleveraging of occupancy costs as a percent of sales, both of which were associated with

40


 

lower net sales as a result of the previously mentioned calendar shifts, as well as deeper discounts on seasonal merchandise in support of our strategy to move to a more efficient inventory model.

 

Occupancy costs, which includes store related rent, common area maintenance, utilities, repairs and maintenance, security, property taxes and depreciation, decreased $1.6 million primarily due to the impact of our divestiture of MW Cleaners. Occupancy costs as a percentage of retail sales increased to 13.3% in the second quarter of 2018 as compared to 13.0% in the second quarter of 2017 primarily due to deleveraging from lower sales.

 

Corporate apparel gross margin increased $0.2 million, or 1.5%, to $14.9 million for the second quarter of 2018 compared to the second quarter of 2017.  For the corporate apparel segment, total gross margin as a percentage of related sales increased to 26.8% in the second quarter of 2018 from 25.4% in the second quarter of 2017 primarily due to the impact of renegotiated pricing arrangements with our UK customers.

 

Advertising Expense

 

Advertising expense decreased to $38.7 million in the second quarter of 2018 from $39.9 million in the second quarter of 2017, a decrease of $1.2 million, or 3.1%.  As a percentage of total net sales, advertising expense was flat at 4.7% in the second quarter of 2018 compared to the second quarter of 2017.

 

Selling, General and Administrative Expenses

 

SG&A expenses decreased to $242.3 million in the second quarter of 2018 from $248.3 million in the second quarter of 2017, a decrease of $6.1 million, or 2.5%.  As a percentage of total net sales, these expenses increased to 29.4% in the second quarter of 2018 from 29.2% in the second quarter of 2017 due to deleveraging from lower sales. The components of this 0.2% net increase in SG&A expenses as a percentage of total net sales and the related dollar changes were as follows:

 

 

 

 

 

 

 

%

    

in millions

    

Attributed to

0.1

 

$

0.6

 

Increase in non-recurring items as a percentage of sales to 0.1% in the second quarter of 2018 from 0.0% in the second quarter of 2017.  In the second quarter of 2018, these costs consisted of $0.4 million related to the closure of a rental product distribution center and a $0.2 million unfavorable final working capital adjustment related to the previously announced divestiture of our MW Cleaners business.  For the second quarter of 2017, we incurred no such costs.

0.3

 

 

(0.6)

 

Store salaries decreased $0.6 million primarily due to the divestiture of MW Cleaners but increased as a percentage of sales to 12.3% in the second quarter of 2018 from 12.0% in the second quarter of 2017 due to deleveraging from lower sales.

(0.2)

 

 

(6.1)

 

Decrease in other SG&A expenses as a percentage of sales to 16.9% in the second quarter of 2018 from 17.1% in the second quarter of 2017.  Other SG&A expenses decreased $6.1 million primarily due to lower operating costs resulting from the divestiture of MW Cleaners and the receipt of insurance proceeds related to last year's hurricanes.

0.2

 

$

(6.1)

 

Total

 

In the retail segment, SG&A expenses as a percentage of related net sales were flat at 23.6% in the second quarter of 2018 compared to the second quarter of 2017.  SG&A expenses decreased $5.7 million primarily due to the divestiture of MW Cleaners.

 

In the corporate apparel segment, SG&A expenses as a percentage of related net sales increased to 24.1% in the second quarter of 2018 from 21.2% in the second quarter of 2017.  Corporate apparel segment SG&A expenses increased $1.1 million.

 

Shared service expenses represent costs not specifically related to the operations of our business segments and are included in SG&A. Shared service SG&A expenses as percentage of total net sales were flat at 5.7% in the second quarter of 2018 compared to the second quarter of 2017. Shared service SG&A expenses decreased $1.5 million.

 

Net (Loss) Gain on Extinguishment of Debt

 

The $8.1 million net loss on extinguishment of debt in the second quarter of 2018 relates to the partial redemption of Senior Notes and consists of $6.1 million loss upon repurchase and the elimination of unamortized deferred financing costs of $2.0 million. 

 

41


 

The $3.3 million net gain on extinguishment of debt in the second quarter of 2017 relates to the repurchase and retirement of $42.6 million in face value of Senior Notes through open market repurchases reflecting a $4.0 million gain upon repurchase partially offset by the elimination of unamortized deferred financing costs totaling $0.7 million. 

 

Provision for Income Tax

 

In December 2017, the U.S. enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Reform Act”). The changes included in the Tax Reform Act are broad and complex, including, but not limited to reducing the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018.  Our federal income tax expense for fiscal 2018 is based on the new rate. 

 

Our effective income tax rate decreased to 16.7% for the second quarter of 2018 from 32.5% for the second quarter of 2017 primarily from enactment of the Tax Reform Act as well as the release of $3.1 million of state valuation allowances. 

 

For the second quarter of 2018, the statutory tax rates in U.S., Canada, UK and Hong Kong were approximately 21%, 26%, 19% and 16.5%, respectively. In addition, we recorded a Canadian withholding tax of 5% based on the removal of the permanent reinvestment representation in the fourth quarter of 2017.  For the second quarter of 2017, the statutory tax rates in U.S., Canada, UK and Hong Kong were approximately 35%, 26%, 20% and 16.5%, respectively.  For the second quarters of 2018 and 2017, tax expense for our operations in foreign jurisdictions totaled $3.4 million and $4.4 million, respectively.

 

Our income tax expense and effective income tax rate in future periods may be impacted by many factors, including finalization of provisional items with respect to the Tax Reform Act, and our geographic mix of earnings and changes in tax laws. 

 

In addition, if our financial results in fiscal 2018 generate a loss or certain deferred tax liabilities decrease, we may need to establish a valuation allowance on our U.S. deferred tax assets, which could have a material impact on our financial condition and results of operations. Lastly, we are currently undergoing several audits, however, we currently do not believe these audits will result in any material charge to tax expense in the future.

 

Net Earnings

 

Net earnings were $49.2 million for the second quarter of 2018 compared with net earnings of $58.5 million for the second quarter of 2017.

 

42


 

For the Six Months Ended August 4, 2018 Compared to the Six Months Ended July 29, 2017

 

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

 

 

 

 

 

 

 

 

 

For the Six Months Ended(1)

 

 

 

August 4,

 

July 29,

 

 

    

2018

    

2017

 

Net sales:

 

 

 

 

 

Retail clothing product

 

74.3

%  

72.1

%

Rental services

 

13.7

 

15.1

 

Alteration and other services

 

4.8

 

5.7

 

Total retail sales

 

92.8

 

92.9

 

Corporate apparel clothing product

 

7.2

 

7.1

 

Total net sales

 

100.0

%  

100.0

%

Cost of sales(2):

 

 

 

 

 

Retail clothing product

 

43.9

 

42.6

 

Rental services

 

15.1

 

16.3

 

Alteration and other services

 

87.1

 

74.8

 

Occupancy costs

 

13.3

 

13.7

 

Total retail cost of sales

 

55.2

 

54.0

 

Corporate apparel clothing product

 

73.6

 

73.6

 

Total cost of sales

 

56.5

 

55.4

 

Gross margin(2):

 

 

 

 

 

Retail clothing product

 

56.1

 

57.4

 

Rental services

 

84.9

 

83.7

 

Alteration and other services

 

12.9

 

25.2

 

Occupancy costs

 

(13.3)

 

(13.7)

 

Total retail gross margin

 

44.8

 

46.0

 

Corporate apparel clothing product

 

26.4

 

26.4

 

Total gross margin

 

43.5

 

44.6

 

Advertising expense

 

4.9

 

5.0

 

Selling, general and administrative expenses

 

30.1

 

31.1

 

Operating income

 

8.6

 

8.5

 

Interest income

 

0.0

 

0.0

 

Interest expense

 

(2.6)

 

(3.1)

 

(Loss) gain on extinguishment of debt, net

 

(1.3)

 

0.2

 

Earnings before income taxes

 

4.7

 

5.7

 

Provision for income taxes

 

0.9

 

2.0

 

Net earnings

 

3.8

%  

3.7

%


(1)

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

(2)

Calculated as a percentage of related sales.

43


 

Net Sales

 

Total net sales increased $7.7 million, or 0.5%, to $1,641.4 million for the first six months of 2018 as compared to the first six months of 2017.

 

Total retail sales increased $4.5 million, or 0.3%, to $1,522.8 million for the first six months of 2018 as compared to the first six months of 2017 due to a $40.9 million increase in clothing product revenues partially offset by a $21.5 million decrease in rental services revenue and a $14.9 million decrease in alteration and other services revenues primarily reflecting the impact of our divestiture of MW Cleaners. The increase in total retail sales is further described below:

 

 

 

 

 

 

(in millions)

    

Amount Attributed to

$

17.4

 

2.1% increase in comparable sales at Men's Wearhouse.

 

 

4.9

 

1.6% increase in comparable sales at Jos. A. Bank.

 

1.2

 

0.8% increase in comparable sales at K&G.

 

3.0

 

2.9% increase in comparable sales at Moores(1).

 

(11.8)

 

Decrease in non-comparable sales (primarily due to closed stores).

 

2.9

 

Increase in net sales resulting from change in U.S./Canadian dollar exchange rate.

 

(13.1)

 

Other (primarily resulting from divestiture of MW Cleaners).

$

4.5

 

Increase in total retail sales.


(1)

Comparable sales percentages for Moores are calculated using Canadian dollars.

 

Comparable sales is defined as net sales from stores open at least twelve months at period end, excluding stores where the square footage has changed by more than 25% within the past year, and includes e-commerce sales. We operate our business using an omni-channel approach and do not differentiate e-commerce sales from our other channels. 

 

The increase in comparable sales at Men's Wearhouse resulted primarily from an increase in transactions for clothing partially offset by a decrease in units per transaction, while average unit retail was flat. At Men's Wearhouse, rental service comparable sales decreased 8.2% primarily reflecting a consumer shift to purchase suits for special occasions as well as a shift in demand for weddings to the third quarter. The increase at Jos. A. Bank resulted primarily from an increase in transactions partially offset by a decrease in average unit retail while units per transaction were flat. The increase at K&G resulted from an increase in units per transaction and a slight increase in average unit retail partially offset by a decrease in transactions. The increase at Moores resulted from an increase in transactions and a slight increase in average unit retail, while units per transaction were flat. 

 

Total corporate apparel clothing product sales increased $3.3 million for the first six months of 2018 as compared to the first six months of 2017 primarily due to a stronger British pound this year compared to last year of approximately $6.5 million partially offset by a decrease in sales at the UK. 

 

Gross Margin

 

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

 

Our total gross margin decreased $15.0 million, or 2.1%, to $714.1 million in the first six months of 2018 as compared to the first six months of 2017.  Total retail segment gross margin decreased $15.9 million, or 2.3%, in the first six months of 2018 compared to the same period last year primarily due to lower rental and alteration services revenue. 

 

For the retail segment, total gross margin as a percentage of retail sales decreased to 44.8% in the first six months of 2018 from 46.0% in the six months of 2017 driven primarily by deeper discounts on seasonal merchandise in support of our strategy to move to a more efficient inventory model partially offset by lower occupancy costs as a percent of sales. 

 

Occupancy costs, which includes store related rent, common area maintenance, utilities, repairs and maintenance, security, property taxes and depreciation, decreased $5.6 million primarily due to the closure of our tuxedo shops within Macy’s in 2017 and the impact of our divestiture of MW Cleaners. Occupancy costs as a percentage of retail sales decreased to 13.3% in the first six months of 2018 from 13.7% in the first six months of 2017.

44


 

 

Corporate apparel gross margin increased $0.9 million, or 3.0%, in the first six months of 2018 as compared to the first six months of 2017.  For the corporate apparel segment, total gross margin as a percentage of related sales was flat at 26.4% for the first six months of 2018 and 2017.

 

Advertising Expense

 

Advertising expense decreased to $79.9 million in the first six months of 2018 from $82.1 million in the first six months of 2017, a decrease of $2.2 million, or 2.7%.  The decrease in advertising expense was driven primarily by reductions in television advertising reflecting a shift to digital advertising, as well as the timing of marketing spend. As a percentage of total net sales, advertising expense was 4.9% in the first six months of 2018 compared to 5.0% in the first six months of 2017.

 

Selling, General and Administrative Expenses

 

SG&A expenses decreased to $493.3 million in the first six months of 2018 from $507.5 million in the first six months of 2017, a decrease of $14.2 million, or 2.8%.  As a percentage of total net sales, these expenses decreased to 30.1% in the first six months of 2018 from 31.1% in the first six months of 2017.  The components of this 1.0% decrease in SG&A expenses as a percentage of total net sales and the related dollar changes were as follows:

 

 

 

 

 

 

 

%

    

in millions

    

Attributed to

(0.7)

 

$

(11.6)

 

Decrease in non-recurring items as a percentage of sales to 0.3% in the first six months of 2018 from 1.0% in the first six months of 2017.  For the first six months of 2018, these costs totaled $4.2 million including a $3.8 million loss on divestiture of our MW Cleaners business and $0.4 million related to the closure of a rental product distribution center.  For the first six months of 2017, these costs totaled $15.8 million related to costs to terminate the Macy's agreement.

(0.3)

 

 

(3.3)

 

Store salaries decreased $3.3 million primarily due to the divestiture of MW Cleaners and decreased as a percentage of sales to 12.4% in the first six months of 2018 from 12.7% in the first six months of 2017.

 —

 

 

0.7

 

Other SG&A expenses increased $0.7 million primarily due to higher employee-related benefit costs and increased incentive compensation expense partially offset by lower operating costs resulting from the divestiture of MW Cleaners.  As a percentage of sales, other SG&A expenses was flat at 17.4% in the first six months of 2018 and 2017.

(1.0)

 

$

(14.2)

 

Total

 

In the retail segment, SG&A expenses as a percentage of related net sales decreased to 24.3% in the first six months of 2018 from 25.6% in the first six months of 2017. SG&A expenses decreased $17.9 million primarily due to anniversarying last year’s costs to terminate the Macy’s agreement. 

 

In the corporate apparel segment, SG&A expenses as a percentage of related net sales increased to 23.5% in the first six months of 2018 from 22.2% in the first six months of 2017. Corporate apparel segment SG&A expenses increased $2.2 million.

 

Shared service expenses represent costs not specifically related to the operations of our business segments and are included in SG&A.  Shared service SG&A expenses as a percentage of total net sales increased to 5.8% in the first six months of 2018 from 5.7% in the first six months of 2017. Shared service SG&A expenses increased $1.5 million primarily due to higher incentive compensation expense.

 

Net (Loss) Gain on Extinguishment of Debt

 

The $20.8 million net loss on extinguishment of debt in the first six months of 2018 consists of the elimination of unamortized deferred financing costs and original issue discount (“OID”) related to the refinancing of our Term Loan totaling $11.9 million and an $8.9 million loss on extinguishment related to our Senior Notes.

 

The $4.0 million net gain on extinguishment of debt in the first six months of 2017 relates to the repurchase and retirement of $50.0 million in face value of Senior Notes through open market repurchases and the excess cash flow prepayment on our Term Loan reflecting a $4.8 million gain upon repurchase partially offset by the elimination of unamortized deferred financing costs totaling $0.8 million. 

45


 

 

Provision for Income Tax

 

Our effective income tax rate decreased to 18.4% for the first six months of 2018 from 35.0% for the first six months of 2017 primarily from enactment of the Tax Reform Act, the release of $3.1 million of state valuation allowances and anniversarying last year’s $2.2 million of tax deficiencies related to the vesting of stock-based awards recorded in the first six months of 2017 resulting from the adoption of new accounting guidance related to stock-based compensation.

 

For the first six months of 2018, the statutory tax rates in U.S., Canada, UK and Hong Kong were approximately 21%, 26%, 19% and 16.5%, respectively. For the first six months of 2017, the statutory tax rates in U.S., Canada, UK and Hong Kong were approximately 35%, 26%, 20% and 16.5%, respectively.  For the first six months of 2018 and 2017, tax expense for our operations in foreign jurisdictions totaled $5.4 million and $6.0 million, respectively.

 

Our income tax expense and effective income tax rate in future periods may be impacted by many factors, including our geographic mix of earnings and changes in tax laws. 

 

In addition, if our financial results in fiscal 2018 generate a loss or certain deferred tax liabilities decrease, we may need to establish a valuation allowance on our U.S. deferred tax assets, which could have a material impact on our financial condition and results of operations.  Lastly, we are currently undergoing several federal, foreign and state audits; however, we currently do not believe these audits will result in any material change to tax expense in the future.

 

Net Earnings

 

Net earnings were $63.1 million for the six months of 2018 compared with net earnings of $60.3 million for the six months of 2017.

 

Liquidity and Capital Resources

 

Our primary sources of working capital are cash flows from operations and available borrowings under our revolving credit agreement, as described below.  The following table provides details on our cash and cash equivalents and working capital position as of August 4, 2018, July 29, 2017 and February 3, 2018: 

 

 

 

 

 

 

 

 

 

 

 

    

August 4,

    

July 29,

 

February 3,

 

    

2018

    

2017

    

2018

Cash and cash equivalents

 

$

68,215

 

$

112,741

 

$

103,607

Working capital

 

$

532,356

 

$

753,024

 

$

669,809

 

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

 

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

 

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

46


 

ability to pay dividends on our common stock has increased from a maximum of $10.0 million per quarter to a maximum of $15.0 million per quarter.

 

Credit Facilities

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

47


 

The Senior Notes are guaranteed, jointly and severally, on an unsecured basis by Tailored Brands, Inc. and certain of our U.S. subsidiaries. The Senior Notes and the related guarantees are senior unsecured obligations of the Company and the guarantors, respectively, and will rank equally with all of the Company's and each guarantor's present and future senior indebtedness. The Senior Notes will mature in July 2022.  Interest on the Senior Notes is payable in January and July of each year. Please see Note 5 for additional information on the partial redemption of $175.0 million in face value of our Senior Notes.

 

Cash Flow Activities

 

Operating activities — Net cash provided by operating activities was $198.0 million and $140.5 million for the first six months of 2018 and 2017, respectively.  The $57.5 million increase was driven by higher net earnings, after adjusting for certain items primarily related to extinguishment of debt and an expected reduction in inventory purchases.

 

Investing activities — Net cash used in investing activities was $6.9 million and $32.3 million for the first six months of 2018 and 2017. The net change of $25.4 million was primarily driven by $17.8 million of net proceeds from the divestiture of MW Cleaners.

 

Financing activities — Net cash used in financing activities was $224.1 million and $72.0 million for the first six months of 2018 and 2017, respectively.  The $152.0 million increase primarily reflects the impact of additional debt repayments this year compared to last year.

 

Share repurchase program — In March 2013, the Board of Directors (the "Board") approved a share repurchase program for our common stock.  At August 4, 2018, the remaining balance available under the Board's authorization was $48.0 million.  During the first six months of 2018 and 2017, no shares were repurchased in open market transactions under the Board's authorization.

 

Dividends — Cash dividends paid were $18.7 million and $18.0 million for the first six months of 2018 and 2017, respectively.  During each of the quarters ended August 4, 2018 and July 29, 2017, we declared quarterly dividends of $0.18 per share.

 

Future Sources and Uses of Cash

 

Our primary uses of cash are to finance working capital requirements of our operations and to repay our indebtedness.  In addition, we will use cash to fund capital expenditures, income taxes, dividend payments, operating leases and various other commitments and obligations, as they arise.

 

During the first six months of 2018, we borrowed and repaid amounts under our ABL Facility with the maximum borrowing outstanding at any point in time totaling $104.5 million.

 

Capital expenditures are anticipated to be approximately $100.0 million for 2018.  This amount includes the anticipated costs to open approximately four Men's Wearhouse stores and to relocate approximately eight stores across our retail brands.  The balance of the capital expenditures for 2018 will be used for store refreshes and other enhancements of our store fleet, investments in computer equipment and systems, distribution facilities improvements, and investment in other corporate assets.

Additionally, market conditions may produce attractive opportunities for us to make 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 Credit Facilities and issuances of debt or equity securities, to take advantage of any acquisition opportunities.

Current and future domestic and global economic conditions could negatively affect our future operating results as well as our existing cash and cash equivalents balances. In addition, conditions in the financial markets could limit our access to further capital resources, if needed, and could increase associated costs. We believe based on our current business plan that our existing cash and cash flows from operations and availability under our ABL Facility will be sufficient to fund our operating cash requirements, repayment of current indebtedness, and capital expenditures.

48


 

Contractual Obligations

 

There have been no material changes to our contractual obligations as discussed in our Annual Report on Form 10-K for the fiscal year ended February 3, 2018, except as related to long-term debt which are summarized below:    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments Due by Period

 

(In millions)

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Contractual obligations

 

Total

 

<1 Year

 

1 - 3 Years

 

4 - 5 Years

 

> 5 Years

 

Long-term debt(1)

 

$

1,645.1

 

$

79.1

 

$

157.3

 

$

474.0

 

$

934.7

 


(1)

Includes interest payments of $70.1 million within one year, $139.3 million between one and three years, $122.8 million between four and five years and $84.3 million beyond five years, at current interest rates including the impact of our interest rate swaps. The payments due by period do not consider amounts which may become payable under the excess cash flow provision of our New Term Loan.  Interest on our ABL borrowings is excluded from the amounts presented in the table due to our inability to predict the timing and settlement of our ABL borrowings.  See Notes 5 and 15 of Notes to Consolidated Financial Statements for additional information.

Critical Accounting Policies and Estimates

 

The preparation of our condensed consolidated financial statements requires the appropriate application of accounting policies in accordance with generally accepted accounting principles.  In many instances, this also requires management to make estimates and assumptions about future events that affect the amounts and disclosures included in our financial statements.  We base our estimates on historical experience and various assumptions that we believe are reasonable under our current business model.  However, because future events and conditions and their effects cannot be determined with certainty, actual results will differ from our estimates and such differences could be material to our financial statements.  There have been no significant changes to our critical accounting policies and estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended February 3, 2018, except as noted below.

 

Loyalty Program Accounting

 

Effective February 4, 2018, we adopted ASC 606, Revenue from Contracts with Customers and all related amendments (“ASC 606”). As a result, we no longer use the incremental cost method approach but will record our obligation for future point redemptions using a deferred revenue model. 

 

We maintain a customer loyalty program for our Men’s Wearhouse, Men’s Wearhouse and Tux, Jos. A. Bank and Moores brands in which customers receive points for purchases. Points are generally equivalent to dollars spent on a one‑to‑one basis, excluding any sales tax dollars, and do not expire. Upon reaching 500 points, customers are issued a $50 rewards certificate which they may redeem for purchases at our stores or online. Generally, reward certificates earned must be redeemed no later than six months from the date of issuance. 

 

When loyalty program members earn points, we recognize a portion of the transaction as revenue for merchandise product sales or services and defer a portion of the transaction representing the value of the related points. The value of the points is recorded in deferred revenue on our condensed consolidated balance sheet and recognized into revenue when the points are converted into a rewards certificate and the certificate is used.

 

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

 

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

 

 

 

49


 

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risks relating to our operations result primarily from changes in foreign currency exchange rates and changes in interest rates.

 

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

 

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

 

As discussed in Note 5 and Note 15 of the Notes to the Condensed Consolidated Financial Statements, we have undertaken steps to mitigate our exposure to changes in interest rates on our New Term Loan.  As of August 4, 2018, 80% of the variable interest rate under the New Term Loan has been converted to a fixed rate.  At August 4, 2018, the effect of one percentage point change in interest rates would result in an approximate $1.8 million change in annual interest expense on our New Term Loan.

 

In addition, borrowings under our ABL Facility bear a floating rate of interest.  As of August 4, 2018, the outstanding borrowings under the ABL Facility were $104.5 million.  At August 4, 2018, the effect of a one percentage point change in interest rates would result in an approximate $1.0 million change in annual interest expense on our ABL borrowings.

 

 

ITEM 4 - CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

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