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Edited Transcript of TLRD earnings conference call or presentation 12-Dec-18 10:00pm GMT

Q3 2018 Tailored Brands Inc Earnings Call

Houston Jan 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Tailored Brands Inc earnings conference call or presentation Wednesday, December 12, 2018 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dinesh S. Lathi

Tailored Brands, Inc. - Executive Chairman of the Board

* Jack P. Calandra

Tailored Brands, Inc. - CFO, Executive VP & Treasurer

* Julie MacMedan

Tailored Brands, Inc. - VP of IR

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Conference Call Participants

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* Janet Joseph Kloppenburg

JJK Research Associates, Inc. - President

* Paul Trussell

Deutsche Bank AG, Research Division - Research Analyst

* William Michael Reuter

BofA Merrill Lynch, Research Division - MD

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Presentation

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Operator [1]

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Greetings, and welcome to Tailored Brands Third Quarter 2018 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Julie MacMedan, Vice President, Investor Relations. Thank you. You may begin.

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Julie MacMedan, Tailored Brands, Inc. - VP of IR [2]

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Thank you, and good afternoon, everyone. Welcome to Tailored Brands' Third Quarter 2018 Results Conference Call. This call is being webcast, and a replay will be available on the company's Investor Relations website, ir.tailoredbrands.com.

Please note that comments made during the conference call contain forward-looking statements within the meaning of the United States federal securities laws. These statements are subject to significant business, economic and competitive risks, uncertainties and contingencies, many of which are beyond our control. Any forward-looking statements are not guarantees of future performance, and actual results may differ materially from those in such forward-looking statements. Please refer to today's earnings release, our annual report on Form 10-K and quarterly reports on Forms 10-Q to understand these risks and uncertainties. You can access all of these reports on the Tailored Brands IR website.

In addition, the information on this call speaks only as of today, December 12, 2018, and we assume no obligation to publicly update or revise our forward-looking statements.

Throughout this conference call, management will be discussing results on an adjusted basis. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures and our explanation of why the non-GAAP financial measures may be useful are discussed in today's earnings release.

With me today are our Executive Chairman, Dinesh Lathi; and our CFO, Jack Calandra. I would now like to turn the call over to Dinesh.

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Dinesh S. Lathi, Tailored Brands, Inc. - Executive Chairman of the Board [3]

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Thank you, Julie, and good afternoon, everyone. It is my pleasure to announce our strong third quarter results. We reported 2.3% comp growth with all brands positive, and we delivered adjusted EPS of $1.01, driven by gross margin expansion and SG&A leverage.

While we were pleased with our third quarter performance, as the quarter progressed, we saw a deceleration of comp sales at our largest brand, Men's Wearhouse, due to lower transactions, and this trend continued into November. While we are taking steps to turn the business around, based on what we are seeing in the business as of today, we have adjusted our full year adjusted EPS guidance range to $2.30 to $2.35 to reflect our lower comp expectations for Men's Wearhouse. We are maintaining our comp outlook for our other retail brands. While we are seeing some softness at Men's Wearhouse in Q4, we believe the growth strategies that have fueled 4 consecutive quarters of positive comps at this brand will continue to drive future growth.

Before I review the Q3 trends and Q4 outlook in more detail, I'll discuss our strategic initiatives that are foundational to our long-term success. As a reminder, our 3 strategic initiatives are to: one, grow the custom business to meet our customers' desire for a personalized look; two, build awareness and elevate the way people think about our brands; and three, deliver a seamless omni experience that makes shopping easier for our customers.

First, I'd like to talk about our custom business. Consumers are increasingly seeking a more personalized look and fit, and we believe they see a custom suit as a great way to achieve that. Our goal is to make buying a custom suit accessible for anyone who is in the market for a suit. We believe we have a sustainable competitive advantage in meeting our customers' needs with custom given our expansive store footprint, highly trained wardrobe consultants and our at-scale supply chain. For the third quarter of 2018, custom sales averaged over $5 million per week, an increase of 150% compared to $2 million per week for the same period a year ago. Year-to-date, custom continues to penetrate at over 20% of all suits sold across our Men's Wearhouse, Joseph A. Bank and Moores brands. This impressive growth in scale speaks to the customer opportunity we are tapping into and our ability to execute against what matters to the customer: speed, selection and service.

Based on the lift we saw in the business in Q1 when we first introduced faster delivery times, we know that speed of delivery matters to our customers. Earlier this year, we shortened standard delivery on our premium, made in America Abboud and Reserve custom clothing to 2 weeks, down from 3 to 4 weeks. In Q3, we continued to shortened delivery times across the product portfolio. On September 1, we launched standard 3- to 4-week delivery for our entry price JOE and 1905 custom suits down from 4 to 6 weeks. We also expanded the rollout of Custom Express, which is available in just 7 days to all Joseph A. Bank and Men's Wearhouse stores as of Q3 and Moores in Q4. Custom Express offers a great value proposition for our customers. It retails for $395 and customers can choose from 3 of our most popular fabrics and select upgrade options, such as working buttonholes and monogramming. We look forward to seeing continued momentum in this offering now that it has been fully deployed across our brands.

In addition to speed, we believe selection is important to the customer. Each of our 3 brands currently offer more than 250 custom suit fabrics, over 100 linings and roughly 200 shirt fabrics to choose from in making a custom garment. Our range of selection allows us to offer a wide variety of options to our customers, including fabrics sourced from some of the most famous mills in Italy. In Q3, we introduced performance fabric options in custom. We offer AWEARNESS Kenneth Cole custom at Men's Wearhouse and Moores, featuring stretch fabrics and construction that allow for a greater range of motion and comfort. At Joseph A. Bank, we also launched traveler custom in both suiting and shirts and TravelTech custom featuring moisture-wicking technology. We're delivering these new products to our customers in 3 to 4 weeks.

Finally, service is a critical component of the custom experience. Service for our target customer is all about convenience, fit and styling. Given the state of measuring technologies, we believe that the only way to get properly measured today is by a wardrobe consultant. With a footprint that puts a store within 10 miles of 70% of men in the U.S. and Canada, we offer a convenient way to get properly measured. Convenience, however, is not enough. There is real skill in measuring and fitting a customer, and we've been investing in our wardrobe consultants to enhance those skills. In early Q3, we introduced a custom fit certification course that provides our team members with competence and the confidence in the fitting process. To date, 80% of our wardrobe consultants have been custom fit certified.

Finally, styling. Many customers need help putting an outfit together. For more than 40 years, our expert wardrobe consultants have been helping customers create complete outfits that include such styling options as pocket squares, vests and fashion socks. These decades of experience, which have served our off-the-rack customers so well, translate perfectly into delivering an outstanding custom suit buying experience. Our customers walk out of the store feeling confident and stylish with the perfect look personalized just for them. Given the customers' positive reaction, custom will continue to be an important initiative for us in 2019.

Our second strategic initiative is to strengthen our brands by growing awareness and elevating our brand perception. This will happen through a combination of dedicating a greater mix of our marketing spend to brand-building storytelling versus price-based promotional messaging as well as through a greater use of digital channels that are suited to brand-building campaigns. In Q3 2018, we spent a meaningfully higher percentage of marketing dollars on brand messaging versus promotional messaging when compared to Q3 2017 at both Men's Wearhouse and Joseph A. Bank. The Men's Wearhouse campaigns that feature the master tailor and Jesse Palmer speak to the styling and fit expertise of our wardrobe consultants, and The Bank Way campaign at Joseph A. Bank speaks to the quality of our craftsmanship. Both campaigns are resonating. In the last 6 months, we've seen a healthy increase in our brand perception metrics at both brands. Given these positive results, we plan to further invest in storytelling campaigns in 2019 as we make a stronger push into digital marketing. We've already begun experimenting with attributable TV, such as Hulu and Golf Channel live stream. And in 2019, we'll continue to invest in streaming TV as well as other digital channels, such as paid social.

Our third strategic initiative is to deliver a superior customer experience by enhancing our omnichannel capabilities. We believe customers want to move from channel to channel with no experiential or transactional friction. Our goal is to remove both channel-specific and cross-channel friction points. Achieving this goal will require both customer-facing and back-end investment and innovation. As an example of customer-facing innovation, we've previously shared with you details on our LIVE! e-commerce solution that connects our wardrobe consultants with online customers. Although we are still in the learning phase of the LIVE! rollout, we continue to see higher average order value and conversion from customers who use LIVE! versus a website-only transaction. Today, we have over 1,000 sales consultants actively participating in the program across both Men's Wearhouse and Joseph A. Bank. While we don't expect this program to be a meaningful driver of financial performance in the near term, we do believe there are long-term value-creation opportunities associated with providing the online customer access to the expertise of our in-store wardrobe consultants. LIVE! is an important step on our path to capitalizing on those opportunities.

On the back end, our technology teams have been hard at work upgrading our corporate and in-store hardware and software infrastructure as well as modernizing our architecture. As an example, this quarter, we will complete the consolidation of all customer data into a single application that gives us a 360-degree view of the customer. Past purchase history, web browsing activity, marketing and call center engagement will now all be in one database. This consolidated view will allow us to reduce customer friction by interacting with our customers in a much more personalized and relevant way, whether it be something as simple as a customized email or as innovative as highly relevant styling suggestions. We're excited about the customer-facing opportunities this back-end work opens up and look forward to sharing details as we start to leverage this new capability.

Turning now to trends in our business. In Q3, we reported 2.3% comp growth with all brands positive. Men's Wearhouse posted 1.7% comp sales, driven by higher average unit retail. Joseph A. Bank posted positive comps of 3.8%, driven by higher transactions and higher average unit retail. K&G comps increased 4%, with all KPIs positive. And Moores comps increased 1.2%, led by higher transactions.

As Q3 progressed, we saw a deceleration in Men's Wearhouse comps that continued into the beginning of Q4. This deceleration was driven in part by decelerating unit comps in total suit sales. We're working to reverse this trend by revising our promotional activity to drive higher suit purchase intent traffic to stores. While the initial results of these efforts are encouraging, we are forecasting Men's Wearhouse comps to be down low single digits in Q4 versus our previous outlook of up low single digits. For the full year, we now expect Men's Wearhouse comps to be flat to up slightly. We are maintaining our annual comp guidance for our other 3 brands. While we are disappointed with the recent Men's Wearhouse trends, we have posted 4 consecutive quarters of positive comps at this brand, and we are confident in our ability to turn this trend back around.

In summary, in Q3, we posted positive comps at all of our brands and delivered strong profitability. While we are seeing some softness at Men's Wearhouse in Q4, we believe the foundational growth strategies that have fueled 4 consecutive quarters of positive comps at this brand will continue to drive future growth. Our full year outlook for Joseph A. Bank, Moores and K&G comps remain on track. Our custom business is strong, and we continue to invest and innovate in this business to make it stronger. With an agile supply chain, a convenient store footprint, experienced and well-trained wardrobe consultants and investments in foundational technology capabilities, we are increasingly well positioned to meet customers' omnichannel shopping needs. We are excited about the opportunity to build greater awareness and improved perception of our brands and to better serve our customers in a more relevant and personalized way. We look forward to sharing more progress on our initiatives on future calls.

With that, I'll turn it over to Jack to review the financials.

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Jack P. Calandra, Tailored Brands, Inc. - CFO, Executive VP & Treasurer [4]

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Thanks, Dinesh, and good afternoon, everyone. Today, I'll review the financial results for the third quarter and our guidance for the fourth quarter and full year 2018. I will also update you on the progress we have made to strengthen the balance sheet and to unlock cash in the business.

I'd like to make sure everyone knows that I will be discussing adjusted numbers today, which eliminate certain costs that are not indicative of core business results. Specifically, our third quarter adjusted GAAP results exclude a goodwill impairment charge of $24 million related to our corporate apparel business, charges of $9.4 million in connection with the favorable repricing of our term loan, cost of $6.4 million associated with the retirement of our former CEO, and expenses of $600,000 related to the previously announced second quarter closure of a rental product distribution center. In total, these charges were $40.4 million, of which $34.3 million were noncash.

Starting now with third quarter results. Total sales were $813 million, up $2 million. Retail segment sales increased 0.6% and were somewhat offset by a 3.6% decrease in corporate apparel segment sales. In the retail segment, we delivered positive 2.3% comp sales growth, and all brands posted positive results. The 1.7% spread between comp and total sales was largely due to the sale of the retail dry cleaning business in Q1, which represented 1.1% of the difference and a weaker Canadian dollar, which represented 0.3%.

Sales in our corporate apparel segment decreased $2 million or 3.6%. We believe the sales decline is the result of continued uncertainty surrounding Brexit and its impact on replenishment demand from existing accounts in the U.K. as well as a weaker British pound. In addition, during Q3, we were notified by a significant U.S. customer that they will not be renewing their existing agreement with us when it expires in May of next year. As a result of these 2 factors, we have lowered our expectations for this segment for Q4 and future periods. We determined that a triggering event occurred during the third quarter, and an interim goodwill impairment test for our corporate apparel segment was required. We concluded that the segment's goodwill was fully impaired and recorded a noncash goodwill impairment charge of $24 million.

Moving to gross margin. Consolidated gross margin of $363 million increased $4 million, largely due to higher retail clothing sales. As a percent of sales, consolidated gross margin increased 40 basis points to 44.6%, primarily due to an increase in retail segment's gross margin rate. Retail segment gross margin rate was up 20 basis points to 46%. The increase was primarily due to 40 basis points of leverage in occupancy cost.

Turning to expenses. Advertising expense decreased $1 million and was down 20 basis points as a percent of sales to 4.6%. SG&A decreased $4 million, primarily due to lower share-based compensation expense and the sale of the retail dry cleaning business, partially offset by higher store commissions for custom sales. As a percent of sales, SG&A decreased 60 basis points to 29.4%.

Operating income increased 12.3% to $86 million. Operating margin increased 110 basis points to 10.6%.

Net interest expense was $19 million, down $5 million compared to last year, reflecting the year-over-year reduction in our total debt. Last year, we reported a $3 million gain on extinguishment of debt through recurring open market repurchases of our senior notes. There were no such gains or losses realized this quarter. Our effective tax rate was 23.9% compared to 32.8% last year. This year's rate primarily reflects the benefit of tax reform.

Third quarter earnings per share were $1.01 compared to $0.75 last year.

Turning now to the balance sheet and cash flow. We continued to reduce inventory and debt and generate strong cash flow from operations. We repaid $46 million on our revolving credit facility during Q3, leaving $59 million of borrowings outstanding on the facility and ended the quarter with $68 million of cash. During Q3, we reduced inventories $98 million or 10% versus last year, largely due to retail inventories, which were down 10%. In October, we successfully repriced our term loan, reducing the interest rate spread by 25 basis points, which lowers our annual interest expense by more than $2 million. We also reduced total reported debt by $40 million. Debt at quarter end was approximately $1.2 billion, down $300 million from Q3 last year. On a trailing 12-month basis, our debt-to-EBITDA ratio was 3.3, and paying down debt continues to be a high priority.

Cash flow from operations for the first 9 months was $278 million, up $25 million versus last year. This was primarily driven by higher net earnings after adjusting for the noncash items I mentioned earlier as well as favorable working capital changes.

CapEx spend was $47 million, approximately $9 million lower than last year. We have lowered our expected CapEx spend this year to $90 million from $100 million, reflecting a timing shift of certain project cash outflows to fiscal 2019.

With respect to real estate, during the quarter, we opened 2 Men's Wearhouse stores and closed 2 Joseph A. Bank stores. The total number of stores at the end of Q3 was 1,469.

Now I will review our outlook for Q4 and fiscal 2018. As a reminder, the 53rd week last year contributed $46 million to total sales and $0.05 to EPS. As Dinesh mentioned, the start to Q4 for Men's Wearhouse has been below our expectations. Based on our revised fourth quarter outlook, we are updating our full year EPS guidance to $2.30 to $2.35. Our updated 2018 guidance assumes the following. For comparable sales, we expect Men's Wearhouse Q4 comp of down low single digits. We now expect full year comp to be flat to up slightly versus previous full year guidance of positive low single digits; Joseph A. Bank Q4 comp of positive low single digits and still expect full year comp to be positive low single digits; for Moores, Q4 comp of positive low single digits and still expect full year comp of positive low single digits; and for K&G, Q4 comp of flat to up slightly and still expect full year comp to be flat to up slightly.

For corporate apparel, we now expect sales to be down mid-single digits for the full year versus our previous guidance of down low single digits. This implies Q4 corporate apparel sales of between $55 million and $60 million, down versus last year, in large part due to lapping new programs for existing customers.

We now expect an effective tax rate of 23% to 24% versus previous guidance of about 25%. We still expect to reduce inventories by a high single-digit percentage. We now expect capital expenditures of about $90 million versus previous guidance of about $100 million. We still expect depreciation and amortization expense of about $100 million. And with respect to real estate, we still expect to close a net 10 stores.

Before I close, I'd like to provide a quick update on the actions we have taken to minimize the impact that any potential new tariffs on imports from China. To be clear, I'm talking about potential new tariffs as the tariffs enacted to date largely do not impact the goods we source from China, and any financial impact from what has been enacted to date is immaterial. That said, our sourcing team has taken aggressive action to minimize the impact of any potential new tariffs. First, we have moved quickly to source less product from China going forward. In 2018, approximately 30% of our direct-sourced products will be imported from China. For 2019, we expect to cut that in half to about 15%. This change in the mix of sourcing countries not only helps to insulate us from potential new tariffs but also provides cost savings versus current production. Second, we have successfully completed negotiations with our Chinese vendors who have agreed to absorb the majority of any new tariffs that affect our products. As a result of these actions, we believe we can absorb new tariffs as high as 25% within our existing product cost structure with little to no impact on our bottom line.

In closing, we posted solid third quarter results and continued to make progress on our strategic and financial priorities. We lowered inventories by 10%, continued to unlock cash in the business and reduced debt by an additional $40 million. While our outlook is tempered given the slower-than-expected start to Q4, we are confident in the foundational strength of our business and our strong competitive advantages over the long term.

Thank you, and now I'll turn the call back to the operator who will open the lines for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Paul Trussell with Deutsche Bank.

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Paul Trussell, Deutsche Bank AG, Research Division - Research Analyst [2]

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Wanted to start with the top line. Can you speak a little bit more to the cadence of comps through the third quarter and when that slowdown began and the magnitude in which sales have weakened quarter-to-date?

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Dinesh S. Lathi, Tailored Brands, Inc. - Executive Chairman of the Board [3]

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Paul, it's Dinesh. I'll take that and Jack can certainly jump in. As we said on the call, we started to see that trend develop in Q3 with it really focused on the back half of Q3, so thinking the late October time frame; and so up through the beginning of October and late September, still feeling pretty good and bullish about the business. That negative trend that started to reel itself in, in late October continued through into November, which was really what has driven sort of this revised outlook and, as we said, taking it down from what was in the Men's Wearhouse business, a positive low single digits to down low single digits. Just a few more points that I'd add on that trend. It really is focused on the Men's Wearhouse business. As we said earlier on the call, we're maintaining our annual comp guidance for the other 3 brands. Second thing I'd say on that is within the Men's Wearhouse, the -- really, the root of this trend is in the non-custom suit part of the business. And this is obviously meaningful because our wardrobe consultants, they build an outfit around the suit for a customer and that shows up as attach rate, which then ends up driving things like units per transaction. We don't think the trend is -- it's not a macro issue with non-custom suits because we're actually seeing favorable unit comps at the Joseph A. Bank business. The third thing I'd add is we're on it. We're taking action. Within the Men's Wearhouse business, as we talked about, we've tuned our promotional strategies, trying to drive higher suit purchase intent traffic into our stores. And while it's still early days, we're encouraged by some of the preliminary results that we're seeing.

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Paul Trussell, Deutsche Bank AG, Research Division - Research Analyst [4]

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I appreciate the color. I'll now just maybe turn into margins. Can you help us better understand how we should think about the puts and takes on gross margin and potential kind of pressure that's coming from incremental promotions needed to drive the top line here?

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Jack P. Calandra, Tailored Brands, Inc. - CFO, Executive VP & Treasurer [5]

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Sure, Paul. This is Jack. So as you know, we don't guide to gross margin. But to be helpful, for Q4, the way I would think about headwinds, tailwinds and net impact is as follows. In terms of the headwinds, clearly, I think some of the refining of the Men's Wearhouse promotional strategy that Dinesh referred to will be a little bit of a headwind for margin. The other thing to remember is the 53rd week, which has a fairly big impact on deleverage of occupancy expense. And then finally, in terms of a headwind for gross margin in Q4 is foreign exchange. As you know, both the British pound and the Canadian dollar have weakened, the British pound substantially recently with the Brexit concerns. And so I would say those are probably 3 headwinds to margin in the fourth quarter. In terms of a tailwind, as you remember, we did a fair amount of clearance in our Joseph A. Bank business last year. And so I think as we go into Q4 this year, that is less pressure on gross margin. But net impact is I would expect gross margin to be lower in Q4 than last year, and that is factored into our updated guidance.

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Paul Trussell, Deutsche Bank AG, Research Division - Research Analyst [6]

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And lastly from me, could you help us better understand the annualized impact of the nonrenewal of the corporate apparel client as well as the thought process you have on that segment of the business going forward just given the trends you're seeing?

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Jack P. Calandra, Tailored Brands, Inc. - CFO, Executive VP & Treasurer [7]

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Yes, sure, Paul. This is Jack again, and I'll take that. I guess, I would start with -- in terms of corporate apparel and its role in the business. I would say nothing new to share with you today. As we've said in the past, there are no significant synergies between our branded retail businesses and our corporate apparel business, and we consider that business to be noncore. We continue to have regular discussions with our board about options to maximize shareholder value of this business, but again, nothing new to share with you today.

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Operator [8]

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Our next question is from Janet Kloppenburg with JJK Research.

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Janet Joseph Kloppenburg, JJK Research Associates, Inc. - President [9]

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I was just wondering if you could talk a little bit about this non-custom suit business slowdown, a few questions surrounding that. Could it be that the custom business is cannibalizing that portion of the business? I don't know if you guys listen to the department store calls, but many of them called out strength in the men's business. Maybe their pricing, the department store pricing has become more aggressive and maybe that's having some impact on the non-custom business. And also, I see your advertising expense continues to go down. I'm just wondering -- I know you've shifted to the digital side, but maybe that's having an impact on traffic and conversion as well. And then, Jack, in terms of the fourth quarter gross margin guide, can you talk about the impact -- I'm sorry, in the fourth quarter guidance, the impact of the currency and the corporate apparel outlook on the fourth quarter guide. I'm trying to learn how much of it -- the guide down has to do with the Men's Wearhouse as opposed to these separate issues.

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Dinesh S. Lathi, Tailored Brands, Inc. - Executive Chairman of the Board [10]

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Janet, it's Dinesh and I'll start off with some of the non-custom part of the business. So just a couple of thoughts there. I think the first thing is with respect to your cannibalization question, we know just from the data we recorded at the point-of-sale that for our custom business, about 80% of the customers for that product are from existing customers, and about 20% are new-to-file. So it's -- I wouldn't view that as an entirely cannibalistic business. That's the first thing. The second thing I'd say is with respect to what's going on in the competitive environment and the department stores, again, I'd point back to what's going on in our Joseph A. Bank business, where we're seeing healthy unit comps, as I said earlier, in the non-custom piece of the business even as we are growing that custom business within that brand quite readily. And so again, I'd point you back to -- I think this is really an issue that's isolated and contained within the Men's Wearhouse business.

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Janet Joseph Kloppenburg, JJK Research Associates, Inc. - President [11]

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So why do you think -- maybe you could explain then why you think it's happening all of a sudden.

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Dinesh S. Lathi, Tailored Brands, Inc. - Executive Chairman of the Board [12]

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Yes. Janet, I think the marketing question that you raised may be a driver of that. And we talked about being a little more brand-oriented in our advertising than promotional. And while we think that was quite effective in the earlier part of the quarter, we definitely had missed some opportunities to match sort of the promotional environment that we saw in the early part of Q4 and the latter part of Q3. And again, that's one of the reasons we've tuned that marketing, as I said, to have our promotional activity match more to the competitive environment.

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Janet Joseph Kloppenburg, JJK Research Associates, Inc. - President [13]

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And is that the case for Joseph A. Bank as well?

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Dinesh S. Lathi, Tailored Brands, Inc. - Executive Chairman of the Board [14]

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Yes. In Joseph A. Bank, I'd characterize the promotional activity there in terms of its frequency as equivalent to last year. But one of the things that, that team is very focused on right now is being a little more strategic with their promotional activity, so for example, mitigating or attenuating the discounting depth in some of their activity there and so picking up some margin dollars there while still being out with promotional messaging.

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Jack P. Calandra, Tailored Brands, Inc. - CFO, Executive VP & Treasurer [15]

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And Janet, this is Jack. So just to answer your question about corporate apparel. So we've guided to corporate apparel revenue in Q4 of $55 million to $60 million. And again, that's versus the $73, call it, million that we did last year. And what I would say is about half of that decline is due to a combination of the 53rd week, which was about $5 million of the decline. And then about 3% of the decline or $2 million is due to the FX rate. So about half of that reduction is due to those 2 factors, with the remaining half being the softer business that we're seeing in the U.K., which we believe is in response to the uncertainty around Brexit and customers being more conservative around their replenishment orders.

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Janet Joseph Kloppenburg, JJK Research Associates, Inc. - President [16]

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So would that account for roughly half of how much you took the annual guidance down, Jack, the rest being from the...

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Jack P. Calandra, Tailored Brands, Inc. - CFO, Executive VP & Treasurer [17]

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We haven't quantified it that way, Janet, in terms of what that piece is worth. But I would say the decision on guidance was largely driven by the Men's Wearhouse business. Obviously, that is our biggest business, and so that was really the factor that drove the decision on guidance, not the corporate apparel revised numbers.

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Janet Joseph Kloppenburg, JJK Research Associates, Inc. - President [18]

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And that reflects having to get the inventories where they get them appropriately in line given the top line shortage?

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Jack P. Calandra, Tailored Brands, Inc. - CFO, Executive VP & Treasurer [19]

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Yes. We're still guiding to inventories to be down high single digits. We still feel good about that. Obviously, as we've said before, custom -- the growth of custom should give us an opportunity to continue to fine-tune inventories, but we're maintaining our inventory guidance for the year.

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Janet Joseph Kloppenburg, JJK Research Associates, Inc. - President [20]

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And do you take anything out of the SG&A side given the top line shortfall, Jack?

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Jack P. Calandra, Tailored Brands, Inc. - CFO, Executive VP & Treasurer [21]

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Yes. Well, there's -- I mean, as you know, Janet, there are some of variable costs that will naturally come out of SG&A as a part of that top line shortfall. But we're also looking at other short-term things that are not in any way going to impact our long-term strategic priorities, which we believe very strongly in. But obviously, there's always the ability to tighten around the margin when business is a little softer than expected.

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Operator [22]

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Our next question is from William Reuter with Bank of America Merrill Lynch.

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William Michael Reuter, BofA Merrill Lynch, Research Division - MD [23]

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My first question is if you're seeing much of a change in terms of the competitive dynamics from online competitors in terms of, I guess, new entrants or entrants you think are gaining share. And I guess, do you have a sense for, if we're talking about tailored or custom suits, what percentage of suits or shirts do you think are being sold online?

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Dinesh S. Lathi, Tailored Brands, Inc. - Executive Chairman of the Board [24]

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So it's Dinesh. I'll take that one. First is I don't have a guess for you on the percentage of custom suits that are being sold online. I would put it in the low percentage numbers. And the reason for that and it speaks to the competitor question that you asked is, as we said earlier on the call, I still believe that an essential element of getting a proper custom suit is getting properly measured. And to be properly measured, you have to come into a store. The technology is just not there yet for an online measurement. And so coming into a store is required, and we enjoy a significant competitive advantage with our footprint. And I'd point to what some of the, call it, native digital players are doing is they attempt to open up stores where they can actually gather that data. It's just validation that our footprint's a real asset. In terms of new competitors onto the market, I don't see a ton of new entrants, certainly, that I view as, in any way, a threat. And again, as I said, I feel very good about the strength, whether it's our footprint or the service that we provide through our wardrobe consultants. That's something we've built up over a 40-year history and has served us well in the off-the-rack business, and it's highly relevant in the custom business.

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William Michael Reuter, BofA Merrill Lynch, Research Division - MD [25]

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All makes sense to me. You talk about the fact that you are continually reviewing your real estate portfolio. I guess, in terms of the softer sales results at Men's Wearhouse, was it certain stores or maybe certain stores that have other competitors in those markets where you saw particularly challenging results? Because you mentioned that it sounds like maybe some promotional activities from others may have contributed to the challenges.

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Jack P. Calandra, Tailored Brands, Inc. - CFO, Executive VP & Treasurer [26]

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Yes. William, this is Jack. So no, we didn't see it in any sort of particular stores or even particular regions, so not aware of any competitive activity that would have affected any individual store's performance. And again, I would just say the Men's Wearhouse fleet is a very healthy fleet. We're very comfortable with the number of stores we have and also the profitability or the 4-wall contribution of those stores, so still feel very good about that fleet and again didn't see any sort of any specific impacts from any competitive actions that you might have noted.

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William Michael Reuter, BofA Merrill Lynch, Research Division - MD [27]

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Okay. And then just lastly from me. Last quarter, you noted that your target leverage ratio was still about 3x over the longer term. Is that still what you guys would affirm?

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Jack P. Calandra, Tailored Brands, Inc. - CFO, Executive VP & Treasurer [28]

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Yes. There's no change in our capital allocation policy, and that includes getting to a debt-to-EBITDA ratio of 3.

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Operator [29]

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We have reached the end of our question-and-answer session. I would like to turn the call back over to management for closing remarks.

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Julie MacMedan, Tailored Brands, Inc. - VP of IR [30]

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Thank you, operator, and thanks, everyone, for joining us on today's call. We look forward to updating you on our year-end results.

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Operator [31]

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Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.